As a finance manager for an MNC, you are asked to forecast
the forward rate of the British pounds based on IRP and PPP. Assume
interest rate parity and purchasing power parity hold. Using the
given information in the table below, answer the following
questions under IRP and PPP assumptions.
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Get Help Now!What will be the forecast for the British pounds one year
forward?
What percentage of appreciation or depreciation does this
forecast imply over the next year period?
Do you think the one year forward rate would underestimate,
overestimate, or be an unbiased estimate of the future spot rate
in one year?
Explain, compare, and contrast your estimates under IRP and
PPP.
Country
Nominal annual interest rate
Annual inflation rate
Spot rate
USA
0.78%
3%
–
UK
1.58%
4.2%
1.6200
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