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What the identical basket of goods should cost in the UK

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Reference no: EM132797386

Question - The following information was obtained from a recently from Bloomberg:

 

United Kingdom

Australia

1-Year government T-bill yield

4.4%

5.4%

Rate of inflation

2.0%

2.977%

The current spot exchange rate is 2.4288 Australian dollars ("AUD") per pound ("GBP"). The 1-year forward exchange rate is 2.4625 AUD per GBP.

Required -

1. Assume that absolute purchasing power parity holds. A basket of goods currently costs 100 AUD. Determine what the identical basket of goods should cost in the UK.

2. Determine if interest rate parity between the two countries is holding (show your calculations).

Reference no: EM132797386

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