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Assume the one-year interest rate is 12% on British pounds and 9% on U.S. dollars. If the current exchange rate of the pound is $1.63,

Assume the one-year interest rate is 12% on British pounds and 9% on U.S. dollars.

  • If the current exchange rate of the pound is $1.63, what is the expected future spot in one year?
  • Suppose a change in expectations causes the expected future spot rate to decline to $1.52. What should happen to the U.S. interest rate?

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