Forward dollar-pound exchange rate for one-year maturity

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Reference no: EM131595468

Investors in both the U.S. and U.K. require the same real interest rate, 3%, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 2% in the U.S. and 1.5% in the U.K. for the next three years. The spot exchange rate is currently $1.50/£. Using parity conditions, what is the most likely forward dollar-pound exchange rate for one-year maturity?

$1.5350/£

$1.5075/£

$1.4925/£

$1.50/£

Reference no: EM131595468

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