Answer all parts of this question.
a. Assume that the spot exchange rate of the British pound is $1.6500. How will this spot rate adjust over the next year according to PPP if the United Kingdom experiences an inflation rate of 7.2 percent while the United States experiences an inflation rate of 4.7 percent?
b. Assume that the spot exchange rate of the Australian dollar is $.9011. The oneyear interest rate is 6.15 percent in the United States and 4.25 percent in Australia. What will the spot rate be in one year according to the IFE? What is the force that causes the spot rate to change according to the IFE?
c. The one-year risk-free interest rate in Canada is 8.5%. The one-year risk-free rate in the U.S. is 4.9%. Assume that interest rate parity exists. The spot rate of the Canadian dollar is $0.9222. What is the forward rate premium (discount)? What is the one-year forward rate of the Canadian dollar?