What may happen to the spot and forward exchange rate if, Ask an Expert

Economics

Suppose the annual interest rate for a UK. money market instrument is 2% lower than the rate of a similar instrument in the U.S. If the forward exchange rate is 2.04 ($/£), according to the covered interest parity (CIP) condition,

a) What should be the spot exchange rate?

b) What may happen to the spot and forward exchange rate if there is an unexpected interest rate cut in the U.K.? Please describe how the equilibrium can be reestablished in the markets?

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M964961

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