(20%) Suppose the 1-year interest rate on GBP is 11% while the US Dollar interest rate

for 1-year is 6%. The current spot exchange rate is $1.80/.

a. What do you expect the spot rate to be in 1 year?

= $1.72 /

b. Suppose that both countries pursue policies which lead to a strengthening of the GBP to $2.00/GBP. Under this scenario, what would expect the British interest to be now if the USD interest rate increases to 7%.

British interest = -3.70%

c. How do the results support the proposition that according to Pure Expectation Theory, the difference between the interest rates in two countries will be equal to the forward premium or discount when the interest rates and the forward rates have the same term to maturity? And further that, If the forward rate is the market's forecast of the future spot rate, then the interest rate differential is approximately equal to the expected change in the spot rate while any difference between national interest rates should reflect the expected change in the expected exchange rate.

Part c is what I am struggling to answer so any help will be greatly appreciated :)