Due to integrated nature of their capital markets, investors in both Tanzania and Kenya

require the same real interest rate $2\mathrm{.}5\%,$ on their lending. There is a consensus in Dar es

Salaam stock exchange and Nairobi Stock exchange that the annual inflation rate is

likely to be $4\mathrm{.}5\%$ in Tanzania and $5\mathrm{.}5\%$ in Kenya for the next three years. The spot

exchange rate is currently TZS $20\mathrm{.}5/$KES

REQUIRED:

$($i$)$ Compute the nominal interest rate per annum in both Tanzania and Kenya

assuming that the Fisher Effect holds.

$($ii$)$ Calculate the expected future spot TZS$/$KES exchange rate in three years from

now assuming that the International Fisher Effect holds

$($iii$)$ Determine the expected one$-$year forward discount$/$premium at which the TZS will

be trading against the KES. Assuming that the interest rate parity holds

$($iv$)$Assuming that the PPP holds, calculate the expected percentage

depreciation$/$appreciation of TZS against the KES one year hence.