(Answered) Suppose s0pound 125pound and the 1-year forward rate is

Finance

Suppose S0$/£ = $1.25/£ and the 1-year forward rate is F1$/£ = $1.20/£. The real interest rate on a risk-free government security is 2 percent in both the United Kingdom and the United States. The U.S. inflation rate is 5 percent.

a. What is the U.K.'s inflation rate if the equilibrium relationships hold?

b. What is the U.K.'s nominal required return on risk-free government securi- ties?

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