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Consider the following table, which reports the spot exchange rate between the dollar and the pound, as well as the interest rates in the
Consider the following table, which reports the spot exchange rate between the dollar and the pound, as well as the interest rates in the UK and the US (standard notation applies): spot 1 month 3 month 6 month 1 year $/ exchange rate $1.5765/1 UK ruk (%) 3.1 4.5 4.7 4.8 (%) | 3.1 4.9 5 5.1 (a) Showing all your calculations, evaluate the 1-month, 1-year, 3-month, and 6-month forward exchange rate between the pound and the dollar; [10 marks] (b) Consider the 1-year interest rates in the UK and in the USA and suppose you have $1,000,000 to invest in a carry trade strategy. Showing all your calculations, derive the corresponding losses/profits if the current spot exchange rate is $1.5765/1 and the spot exchange rate one year from now remains unchanged. [10 marks]
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a To evaluate the forward exchange rates we can use the interest rate parity formula Forward Rate Sp...Get Instant Access to Expert-Tailored Solutions
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