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Due to the integrated nature of their capital markets, investors in both the U.S. and U.K. require the same real interest rate, 2.5% on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 3.5% in the U.S. and 1.5% in the U.K. for the next three years. The spot exchange rate is currently $1.50/£. Consider $ as home currency.

a. Calculate the nominal interest rate per annum in both the U.S. and U.K., assuming that the Fisher effect holds.

b. Compute the forward $/£ exchange rate for one-year maturity.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92825240

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