a) Explain why 'Purchasing Power Parity' might fail to be a good predictor of future exchange rates.

b) Which economic theory (based on monetary variables) do you think is more appropriate to predict short term exchange rate movements? Explain your reasons.

c) Here are some statistics:

GBP() CHF

Inflation (annual rate) 10% 4%

One-year interest rate 12% ?%

Spot exchange rate (CHF/) 3%

Expected exchange rate (in one year) ?%

One-year forward exchange rate (CHF/) ?%

Based on the linear approximation of international parity relations, replace the question marks with the appropriate answers.