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5A. Suppose the current spot rate for the UK pound is $1.9586/£. The annual inflation rates in the US and in the UK are expec

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Answer #1

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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