Question
8-1 Money and foreign exchange markets in London and New York are very efficient. The following information is available: Assumptions London New York Spot exchange
| 8-1 Money and foreign exchange markets in London and New York are very efficient. The following information is available: |
| Assumptions |
| London |
| New York |
| Spot exchange rate ($/) |
| $1.3860 |
| $1.3860 |
| One-year Treasury bill rate |
| 3.800% |
| 4.200% |
| Expected inflation rate |
| ? |
| 2.000% |
What do the financial markets suggest for inflation in the UK next year? (Hint: use the equation for the exact Fisher Effect.)
|
| b. Estimate today's one-year forward exchange rate between the dollar and the pound, knowing the current spot rate and the current interest rate quotes for the US and the UK. |
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Cases in Finance
Authors: Jim DeMello
3rd edition
1259330476, 1259330478, 9781259352652 , 978-1259330476
