As of November 1, 2017, the nominal exchange rate between the Brazilian real and the U.S. dollar is BRL1.95/USD. The consensus forecast for the U.S. and Brazil inflation rates for the next 1-year period is 2.6% and 20.0%, respectively. Assume UIP and relative PPP holds.

(a) What would you forecast the nominal exchange rate to be at around November 1, 2018? (4 marks)

(b) If the U.S. interest rate on bonds with one-year to maturity is 4%, what would you expect the interest rate for a Brazilian bond with one-year to maturity to be? (4 marks)