On September 16, 1992, numerous currency traders (leading among them was George Soros' Quantum Fund which had amassed a short position against the pound-sterling of roughly $10 billion) began selling Pounds. The Bank of England, with declining foreign reserves, 1 raised interest rates from 10 to 15 percent, but even so were unable to continue o maintain the artificial price floor and ultimately removed the Pound from the ERM and allowed the Pound to depreciate further.

C. Use the Interest Parity relationship to discuss how currency traders' EXPECTATIONS (from "a") would start to affect the flow of investment to/from the UK (and demand for the Pound).

D. When will the investment shifting stop? [HINT: be sure to address the potential affect on the spot exchange rate]

E. Use your answer to "d" to explain why the Bank of England, still participating in the ERM, raised interest rates 50% (from 10% to 15%) on September 16, 1992.