The separation of over 3,000 nautical miles and five time zones, money and foreign exchange markets in

Question:

The separation of over 3,000 nautical miles and five time zones, money and foreign exchange markets in both London and New York are very efficient. The following information has been collected from the respective areas:

Assumptions ________________London___________________New York

Spot exchange rate ($/€)..............1.3264.................................1.3264

One-year Treasury bill rate.........3.900%............................................4.500%

Expected inflation rate...............Unknown................................1.250%

a. What do the financial markets suggest for inflation in Europe next year?

b. Estimate today's one-year forward exchange rate between the dollar and the euro.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...