a) Suppose that the spot rate today is £0.6284/$ and the 180 day forward rate is £0.6203/$. Is the pound at a forward discount or premium with respect to the dollar? Treat the dollar as the home currency and calculate the annualized percentage by which the pound is trading at a premium or discount with respect to the dollar.
b) Take the current spot exchange rate to be $1.3194/£. Suppose that the expected inflation over the coming year is 0.75% in the UK and 2.25% in the United States. What is the expected value for the spot exchange rate a year from now, according to relative purchasing power parity?