1. Assume annualized interest rates in the U.S. and United Kingdom are 4% and 6%,respectively, and one pound is worth $1.35.
(a) What is the one-year forward rate that makes you indifferent between investing in the U.S. and investing in the U.K?
(b) What is the one-year forward rate that makes you prefer the UK investment overthe US investment?
2. Consider Problem 3, again.
(a) Does uncovered interest parity predict an 180-day appreciation or depreciation ofthe pound against the U.S. dollar?
(b) What is the expected 180-day spot rate under no arbitrage?
(c) Quantify the expected percentage change in the 180-day exchange rate under noarbitrage.
(d) Answer all questions again using the opposite exchange rate ($/£ or £/$).