Question
A British money financer is managing 10 million Euro and wants to invest it in safe bonds either in France or UK for one year.
A British money financer is managing 10 million Euro and wants to invest it in safe bonds either in France or UK for one year. The one-year interest rate is 0.63% in UK and 0% in France. The one-year forward euro-pound exchange rate is 1.121 Euro/Pound. Assume that the covered interest parity condition (CIP) always holds and to ensure consistency, treat the UK as home country.
Suppose financer believes uncovered interest parity condition also holds and the foreign exchange market participants are acting based on correct expectations about future spot euro-pound exchange rate in the sense that their expectations predict the future rate without bias. Given these assumptions, what is the one-year expected spot euro-pound exchange rate prevailing in the market?
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