Question: 2. Consider the exchange rate between the U.S. $ and the U.K. . Suppose the exchange rate E is defined as /$. Denote the one-year

2. Consider the exchange rate between the U.S. $ and the U.K. . Suppose the exchange rate E is defined as /$.

Denote the one-year forward exchange rate (at time t) for time t+1 by F t+1. Suppose the nominal interest rate in the U.S. is 8%, the nominal interest rate in the U.K. is 5%, the current exchange rate E t is 0.67/$, and the forward exchange rate F t+1 is 0.625/$. Are the numbers given here consistent with the interest rate parity equation? Clearly show all calculations. Based on this information, would you prefer to invest in the U.S. or in the U.K.?

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