Purchasing Power Parity

1 yr inflation is:

Euro 0.50%

US 1.25%

GBP 0.80%

The real risk free rate is the same around the globe.

The US 1 yr rate is 1.90%.

1. What should the 1 year rates be in EUR and GBP?

2. What are the expected changes in EUR and GBP?

3. If GBPUSD is 1.15 and one ounce of gold costs 1200 pounds, how much should it cost in USD?

4. If GBPUSD is 1.15, one ounce of gold costs 1200 pounds, and one ounce of gold costs $1600, describe the trades necessary to earn a riskless profit.