Suppose the 30-day interest rate in the United States is 1.2% per month and that in Great Britain is 0.5% and the interest parity condition holds.

a. By how much would you expect the the value of the U.S Dollar relative to the British pound to change over the next 30 days? Explain.

(Hint:Assume the spot market dollar-pound exchange rate 30 days from now will equal the current 30-day forward rate. Use the interest parity condition and be sure to explain whether the dollar will appreciate in value of depreciate.)

b.Suppose that for an unknown reason the interest parity condition does not hold and the current spot and forward exchange rates are equal to one another.Given the interests assumed above, what will speculators think and why willthis cause the interest parity condition to eventually hold?