Item$5$

$12\mathrm{.}5$points

Time Remaining $1$ hour $37$ minutes $51$ seconds

$01$:$37$:$51$

References

Item $5$

Time Remaining $1$ hour $37$ minutes $51$ seconds

$01$:$37$:$51$

Problem $6\mathrm{.}10$

Due to the integrated nature of their capital markets, investors in both the United States and the U$.$K$.$ require the same real interest rate, $3\mathrm{.}1$ percent, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be $4\mathrm{.}1$ percent in the United States and $2\mathrm{.}1$ percent in the U$.$K$.$ for the next three years. The spot exchange rate is currently $$2\mathrm{.}10$ per $.$

Required:

Compute the nominal interest rate per annum in both the United States and the U$.$K$.,$ assuming that the Fisher effect holds.

What is your expected future spot dollar$-$pound exchange rate in three years from now?

Can you infer the forward dollar$-$pound exchange rate for one$-$year maturity?