Due to the integrated nature of their capital markets

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Due to the integrated nature of their capital markets, investors from the U.S. and the UK require the same real interest rate, 2.5% for their loans. There is consensus in the capital markets that the inflation rate will probably annual of 1.5% in the U.S. and 2.5% in the UK over the next three years. The spot rate is currently $ 1.34 dollars/ pound. a) Calculate the annual nominal interest rate in the U.S. and in the UK, if it meets the Fisher effect. b) What is your expected spot rate in the future for the dollar-pound in three years?

Reference no: EM13730350

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