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    Foreign Exchange Rate

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    Please help with the following problems.

    The U. K. pound is trading at 1.82 U.S. dollars per U.K. pound. There is purchasing power parity at this exchange rate. The interest rate in the U.S. is 2.5 percent a year and the interest rate in the U.K. is 3 percent a year.

    a. Calculate the U.S. interest rate differential.
    b. What is the U.K. pound expected to be worth in terms of U.S. dollars one year from now?
    c. Which country more likely has the lower inflation rate? How can you tell?

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    Solution Preview

    The U.K. pound is trading at 1.82 U.S. dollars per U.K. pound.  There is purchasing power parity at this exchange rate.  The interest rate in the U.S. is 2.5 percent a year and the interest rate in the U.K. is 3 percent a year.

    a. Calculate the U.S. interest rate ...

    Solution Summary

    The following posting helps with exchange rate problems. It helps calculate the U.S. interest rate differential, the expected value of the U.K. pound and countries' inflation rates. The answers are given in Excel.

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