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Suppose $1.25/ and the 1-year forward rate is $1.20/. The real interest rate on a risk-free government security is 2 percent in both the United

  1. Suppose $1.25/ and the 1-year forward rate is $1.20/. The real interest rate on a risk-free government security is 2 percent in both the United Kingdom and the United States. The US inflation rate is 5 percent.
    1. a. What is the UKs inflation rate if the equilibrium relationships hold?
    2. b. What is the UKs nominal required return on risk-free government securities?

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