UMB is considering in launching a new Absolute Currency Return Fund. In order to establish a currency hedging strategy, Caleb gathers the following information about foreign exchange rates, spot rate, forward rate, inflation and interest rates.

Exhibit 5

USD/GBP 1.6500

CHF/USD 1.8460

Spot rate: USD/GBP 1.8328

90-day forward rate USD/GBP 1.8432

CAD/USD spot rate 1.18

Expected U.S. inflation 4%

Expected Canadian inflation 2%

U.S. Interest rate 8%

Canadian Interest rate 5%

Question

Based on the data presented in Exhibit 5 and according to relative purchasing power parity: Show Work

A. The Canadian dollar will appreciate by 2% and expected CAD/USD spot rate will be 1.1564.

B. The U.S. dollar will depreciate by 2% and expected CAD/USD spot rate will be 1.2036.

Question

Based on the data presented in Exhibit 5, what is the annualized forward GBP is discount or premium for the USD/GBP (Spot rate: $1.8328 and forward rate: $1.8432) quote: Show work

A. 2.27%, Premium and GBP is a strong currency.

B. 2.27%, premium and the USD is a strong currency.