2. Consider an investor seeking to invest in United Kingdom. Assume that uncovered interest E e E HKF E HHF of the British pound and U. S. dollar. parity holds, 1' H : 3'}; + H\" . Explain how each of the following would affect the value a. What would happen to the spot rate EM if British interest rate rose? b. If U.S. interest rise, What must happen to the expected dollar return on British deposits? c. What could explain a sudden depreciation in the dollar if U.S. and British rates do not change? Useful Formulas: EHIF - EHIF Fe qHIF = (EHIFPF )/ PH PH i = i* EHIF= =1F + + LH PF EHIF E FA = CA + KA S =I+ CA S = Spts g Change in External Wealth = AW = CA + KA + Valuation Effects Change in Domestic Wealth = AWD = I + Capital Gains on K PV(Q) = PV(C) + PV(I) AQ PV(Q) = 0+2 MPK 27* AK