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I'm primarily interested in the last question put inBold:If the spot rate for British pounds is 0.6 pounds equals 1 US $,and annual interest rate on fixed rate one-year deposits of poundsis 3.25% and for US$ is 2.25%, what is the eighteen-month forwardrate for one dollar in terms of pounds?Assuming the same interest rates, what is the 36-month forwardrate for one pound in dollars? Is this an indirect or a directrate?If the forward rate is an accurate predictor of exchange rates,in this case will the pound get stronger or weaker against thedollar? What does this indicate about the market’s inflationexpectations in the UK compared to the US?Assume you plan to buy 10 million pounds of UK consolsand hold them for three years, using the information above whatwould be your hedged annual cash flow in dollars. What is a way youcould hedge your exposure if you thought the $ wouldweaken?
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