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For this question you should assume that there are four economies – the U.S, the U.K,...

For this question you should assume that there are four economies – the U.S, the U.K, Canada and Europe. The U.S is the home economy. You are given the following information. The U.S interest rate is 0.08.

                              Interest Rate               Spot Exchange rate     Forward rate  

U.K                        0.05                             1.0

Canada                  0.15                             2.0

Europe                                                                                          0.5                  

  1. What is the spot exchange rate between the U.K and Canada where the U.K is the home country?

b.   What is the expected return for a U.S investor investing in Europe?

c.   Suppose that inflation in the U.S will be three percent. What is inflation in Canada?

d.   What is the real interest rate in Europe

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