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As a finance manager for an MNC, you are asked to forecast the forward rate of the British pounds based on IRP and PPP. Assume
As a finance manager for an MNC, you are asked to forecast the forward rate of the British pounds based on IRP and PPP. Assume interest rate parity and purchasing power parity hold. Using the given information in the table below, answer the following questions under IRP and PPP assumptions. What will be the forecast for the British pounds one year forward? What percentage of appreciation or depreciation does this forecast imply over the next year period? Do you think the one year forward rate would underestimate, overestimate, or be an unbiased estimate of the future spot rate in one year? Explain, compare, and contrast your estimates under IRP and PPP. Country Nominal annual interest rate Annual inflation rate Spot rate USA 0.78% 3% - UK 1.58% 4.2% 1.6200
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