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5. (a) Figure 3 shows the annualised yields on government debt securities in the UK and U.S. Assume that uncovered interest parity (UIP) holds. Describe

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5. (a) Figure 3 shows the annualised yields on government debt securities in the UK and U.S. Assume that uncovered interest parity (UIP) holds. Describe the expected future time path of the dollar-pound exchange rate Es/$ over the course of the coming 24 months. [50 marks] Figure 3 Hypothetical UK and U.S. yield curves 0.07 6.50% 6.00% 0.06 5.00% 0.05 4.50% 4.00% 0.04 3.50% 0.03 2.00% 0.02 1.50% Sterling interest rate 0.01 Dollar interest rate 0 0 3 6 9 12 24 Months ahead

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