Compute the nominal interest rate per annum

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Reference no: EM133120338

Suppose that investors in both Canada and the UK require the same real interest rate of 2.5% on their lending.  Also suppose that there is concensus in the capital markets that the annual inflation rate is likely to be 3.5% in Canada and 1.5% in the UK for the next three years.  The current spot exchange rate is $2.30 per UK Pound.

Required:

a) Compute the nominal interest rate per annum for this three year horizon, assuming the Fisher Effect holds, in 

i) Canada

ii) UK

b) According to Interest Rate Parity (IRP), what should the forward rate be for the UK Pound, priced in dollars, for a two year contract?

c) Compute the future spot exchange rates you expect for

i) one year from now

ii) two years from now

iii) three years from now

Reference no: EM133120338

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