Please answer the following two problems:
Question 1: Interest Rate Parity
The current 90-day interest rate in the United States is 1 percent. The current 90-day interest rate in France is 2 percent. The current spot rate for the French franc (FF) is $0.18679/FF. If the interest rate parity (IRP) holds between the United States and France, what is the expected 90-day forward rate?
Question 2: Purchasing Power Parity
The economists at DRI, Inc. have recently forecasted a U.S. inflation rate of 3 percent over the coming year. In their world economic outlook report, they have forecasted an inflation rate of 6 percent in Italy over the coming year. The current spot rate of exchange for the Italian lira is $0.0006323. If purchasing power parity (PPP) holds, what would your forecast be for the dollar value of the lira in one year?