The 9-Months Inflation Rate in Great Britain Is Expected to Be

question 8

Essay

The 9-months inflation rate in Great Britain is expected to be 4% p.a.,and the 9-months inflation rate in Switzerland is predicted to be 6% p.a.The real interest rate is 3% in Great Britain.Assume that the parity conditions hold.
a)What is the nominal interest rate in Switzerland?
b)What is the nine-month forward rate of the Swiss franc with respect to the British pound?
c)If the inflation rates are expected to stay unchanged over the next two years,what is the expected spot exchange rate between the British pound and the Swiss franc in two years?

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Definitions:

Outlays

Expenditures or the amount of money expended in the course of conducting business or executing a project.

Collateral

Collateral refers to assets that a borrower offers to a lender to secure a loan. If the borrower defaults, the lender can seize the collateral to recover the loaned amount.

Fixed-Rate Mortgage

A mortgage with an interest rate that remains constant throughout the life of the loan.

Acceleration Clause

A contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain agreed upon conditions are not met.