1. If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 10 percent, the spot exchange rate is $1.75/pound 1, and interest rate parity holds, what must be the one-year forward exchange rate?
2. Suppose all of the conditions in Problem 18 hold except that the forward rate of exchange is also $1.75/pound 1. How could an investor take advantage of this situation?
3. If a bundle of goods in Japan costs yen 4, 020 000 while the same goods and services cost $40,000 in Unite States, what is the current exchange rate of U.S. dollars for yen? If, over the next year, inflation is 6 percent in Japan and 10 percent in the United States, what will the goods cost n year? Will the dollar depreciate or appreciate to the yen over this time relative period?