Forward dollar-pound exchange rate for one-year maturity

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1. Companies ABC & XYZ can borrow for a three year term at:

Moody credit rating ABC XYZ

Fix-rate 9.75% 12.75%

Floating rate Libor+0.25% Libor +1.25%

Assume that a swap bank is inbolved as an intermediary. The swap bank is give a quote on three year interest rate against Libor flat. What is the lowest Bid the swap bank can quote?

2. Investors in both the US and UK 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 UK for the next three years. The spot exchange rate is current $1.5. Using parity condition, what is the most likely forward dollar-pound exchange rate for one-year maturity?

Reference no: EM131865323

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