Due to the integrated nature of their capital markets, investors in both the U.S. and U.K. require the same real interest rate, 2.5% on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 3.5% in the U.S. and 1.5% in the U.K. for the next three years. The spot exchange rate is currently $1.50/£. Consider $ as home currency.
a. Calculate the nominal interest rate per annum in both the U.S. and U.K., assuming that the Fisher effect holds.
b. Compute the forward $/£ exchange rate for one-year maturity.