Question: Suppose that in an emerging economy the current 1-year, 2-year and 3-year spot interest rates are given as in the table: Year Current Spot Rate

Suppose that in an emerging economy the current 1-year, 2-year and 3-year spot interest
rates are given as in the table:

Year	Current Spot Rate
1 (s1)	5.25%
2 (s2)	7.25%
3 (s3)	6.25%

a) Use the Pure Expectation Hypothesis (PEH) to calculate the one-year-ahead future
spot rate at the end of periods one (1F2) and two (2F3).

b) Explain whether or not there are any differences between the future spot interest
rates in (a) and the actual one-period spot rates which will prevail in one and two
years.

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