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Due to the integrated nature of their capital markets, investors in both the U.S. and U.K. require the same real interest rate, 1%, on their
Due to the integrated nature of their capital markets, investors in both the U.S. and U.K. require the same real interest rate, 1%, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 2% in the U.S. and 3% in the U.K. for the next three years. The spot exchange rate is currently $1.80/. [Refer to Ch06 End-of-Chapter Problem \#10] (1) The nominal interest rate per annum in the U.S. is percent., asssuming that the Fisher effect holds. (2) The nominal interest rate per annum in the U.K. is percent., asssuming that the Fisher effect holds. (3) An expected future spot dollar-pound exchange rate in three years from now is : per pound, asssuming that the IFE holds
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