Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe
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Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is
$1.80. The spot rate of the Swiss franc is 0.3 pounds.
You expect that the 1-year inflation rate is 7 percent in the United Kingdom, 5 percent in Switzerland, and 1 percent in the United States. The 1-year interest rate is 6 percent in the United Kingdom, 2 percent in Switzerland, and 4 percent in the United States. What is your expected spot rate of the Swiss franc in 1 year with respect to the U.S. dollar? Show your work.
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