Question
1) Today, a representative basket of goods is priced at $150 in the US and at 75 in the UK. The nominal interest rate paid
1) Today, a representative basket of goods is priced at $150 in the US and at 75 in the UK. The nominal interest rate paid on a USD denominated savings account is 2%, while the interest rate for a GBP denominated savings account is 3%. Assuming no arbitrage opportunity exists, and that real interest rates are the same in all countries,
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a) What should the spot rate for the GBP/USD be if the absolute PPP holds?
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b) Assuming that the absolute PPP holds, what should the 1 year forward rate for GBP/USD be?
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c) Which currency would you expect to appreciate? By how much?
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Financial Management Theory And Practice
Authors: Prasanna Chandra
9th Edition
9339222571, 978-9339222574
