Question 1: Calculate the nominal interest rate per annum in both the United States and the United Kingdom (U.K.), assuming that the Fisher effect holds, based on the following information:

• Due to the integrated nature of their capital markets, investors in both the United States and the U.K. require the same real interest rate, 4.0 percent, on their lending.
• There is a consensus in capital markets that the annual inflation rate is likely to be 5.0 percent in the United States and 3.0 percent in the U.K. for the next 3 years.
• The spot exchange rate is currently $3.0/.

Tip: Nominal interest rate per annum is calculated by using this formula:

is the real interest rate expressed in decimals.

E() is the expected value of inflation, also expressed in decimals.

Question 1 Answers: Type in your answers to Question 1 below. Be sure to show your calculations

Question 2: Calculate the expected future spot dollar-pound exchange rate in 3 years from now. Hint: Use the nominal interest rates you calculated in Question 1. Do not round intermediate calculations.

Expected future spot dollar-pound exchange rate in years from now is calculated using this formula:

Question 2 Answer: Type in your answer to Question 2 below. Round to 4 decimal places.

Question 3: Calculate the forward dollar-pound exchange rate for one-year maturity, using the in the following formula. Hint: Since the maturity time is 1 year, replace with 1.

Question 3 Answer: Type in your answer to Question 3 below. Round to 4 decimal places.

(1+)(1+E)1 (1+nominalU.Krate)n(1+nominalU.Srate)n current spot rate (1+nominalU.Krate)n(1+nominalU.Srate)n current spot rate