Question: 6. Consider Problem 3, again. (a) Does uncovered interest parity predict an 180-day appreciation or depreciation of the pound against the U.S. dollar? (b) What

6. Consider Problem 3, again.

(a) Does uncovered interest parity predict an 180-day appreciation or depreciation of the pound against the U.S. dollar?

(b) What is the expected 180-day spot rate under no arbitrage?

(c) Quantify the expected percentage change in the 180-day exchange rate under no arbitrage.

(d) Answer all questions again using the opposite exchange rate ( $ or $ ).

3. Assume annualized interest rates in the U.S. and United Kingdom are 4% and 6%, respectively, and one pound is worth $1.35.

(a) What is the one-year forward rate that makes you indifferent between investing in the U.S. and investing in the U.K?

F = 1.3245

(b) What is the one-year forward rate that makes you prefer the UK investment over the US investment?

F < 1.3245

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