Question: 1. The current exchange rate is $2/£. The annual interest rate on 60-day US- dollar denominated bonds is 5% and the annual interest rate on 60-day pound denominated bonds is 11%. Investors currently expect the exchange rate to be $1.98/£ in 60 days.
2. What is likely to be the effect on the current exchange rate if the interest rate on the 60 day pound denominated bonds declines to 8 percent, and the dollar interest rate and the expected exchange rate are unchanged?