Spot exchange rates are properly aligned

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Reference no: EM131921606

The spot rate of the Australian dollar is $0.50, and the spot rate of the British pound is $1.30. You expect that the one-year inflation rate is 8 percent in the U.K., 6 percent in Australia, and 2 percent in the U.S. The one-year interest rate is 5% in the U.K., 11% in Australia, and 3% in the U.S.

Assume that locational arbitrage and triangular arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in the International Fisher Effect. What is your expected spot rate of the British pound in one year with respect to the Australian dollar?

Reference no: EM131921606

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