uestion 1 (i) The UK inflation rate is predicted to be 15% and the Euroland inflation rate is predicted to be 5%. The current Euro/£ exchange rate is 1.60 Euros per pound. What is the expected Euro/£ rate in one year’s time according to PPP? (ii) The $/£ spot rate is $1.60/£1. The UK interest rate is 4% and the US interest rate is 9%. Calculate the one year forward rate using the covered interest parity formula. State if the pound is at a forward discount or at a forward premium
uestion 1 (i) The UK inflation rate is predicted to be 15% and the Euroland inflation rate is predicted to be 5%. The current Euro/£ exchange rate is 1.60 Euros per pound. What is the expected Euro/£ rate in one year’s time according to PPP? (ii) The $/£ spot rate is $1.60/£1. The UK interest rate is 4% and the US interest rate is 9%. Calculate the one year forward rate using the covered interest parity formula. State if the pound is at a forward discount or at a forward premium
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question 1
(i) The UK inflation rate is predicted to be 15% and the Euroland inflation rate is predicted to be 5%. The current Euro/£ exchange rate is 1.60 Euros per pound. What is the expected Euro/£ rate in one year’s time according to PPP?
(ii) The $/£ spot rate is $1.60/£1. The UK interest rate is 4% and the US interest rate is 9%. Calculate the one year forward rate using the covered interest parity formula. State if the pound is at a forward discount or at a forward premium.
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