Homework Answers
As per purchasing power theory, the currency of country with lower inflation rate appreciates.
Hence, the answer is a.The U.S. Dollar should appreciate over the next year.
5B. Forward rate = Spot rate*(1+interest rate US)/(1+Interest rate UK)
= 1.9586(1+2%)/(1+5%)
= $1.90264/Pound
i.e. a
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