You own property in London U.K. which is not a member of the European Monetary System. The property is worth 575 million British Pounds today November 5, 2019. The property generates annual rents of 45 million British Pounds with the next annual payment due on or about November 5, 2020. However, you got married to Dr. "Looser" who is an expert in the Foreign Exchange Markets, and he/she STIPULATES and advises you to sell this property today and repatriate the proceeds to San Francisco within one-year time period.

Assume that the interest rate parity holds, that investors are risk neutral and that the real interest rate is the same in either country. You have the following information.

1. DOMESTIC U.S. - FOREIGN ENVIRONMENT U.K.

2.The Current SPOT Exchange rate is: 1 (BP) = 1.85 $.

3.The Current and Future U.K Inflation Rate is 4%.

4.The Rate at which your property appreciates is 35%.

5.The Current and Future U.S. Inflation Rate is 3%.

6.The one year U.K. Nominal Interest rate is 8%.

a.Suppose that you sell the property today and repatriate the (BP) proceeds today, then investing the $ receipts in the U.S. interest rate. What are the interest proceeds and what will your $ wealth be on or about November 5, 2019?

b.Suppose that you sell the property exactly on November 5, 2020. What will your $ wealth be?

c.What the OPPORTUNITY COST or Translation Gain/Loss will be?

d.What the Forward Premium/ Forward Discount will be? Explain your answers carefully.

e.What are the values of the real interest rates in both countries?

f.What does the Risk Neutrality Equation States?