Topic 1: The interest rate on South Korean government securities with one-year maturity is 4 percent and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. government securities with one-year maturity is 7 percent and the expected rate of inflation is 5 percent. The current spot exchange rate for Korea won is $1 = W1,200. Forecast the spot exchange rate one year from today. Explain the logic of your answer.

Topic 2: Two countries, Britain and the US produce just one good: beef. Suppose that the price of beef in the US is $2.80 per pound, and in Britain it is 3.70 per pound.

(a) According to PPP theory, what should the $/ spot exchange rate be?

(b) Suppose the price of beef is expected to rise to $3.10 in the US, and to 4.65

in Britain. What should be the one year forward $/ exchange rate?

(c) Given your answers to parts (a) and (b), and given that the current interest rate in the US is 10 percent, what would you expect current interest rate to be in Britain?