Britain and the US produce just one good beef The price of

Britain and the U.S. produce just one good - beef. The price of beef in the U.S. is $2.80 per pound, and in Britain it is £3.70 per pound.

According to PPP theory, what should the $/£ spot exchange rate be?

Suppose the price of beef is expected to rise to $3.10 in the U.S. and to £4.65 in Britain. What should be the one year forward $/£ exchange rate?

(a) 2.80/3.70=$0.76/pound
(b) One year forward rate=3.1/4.65=$ 0.67 per pound

1 year forward rate(FR)=0.67

US Interest Rate (iUS)=0.1

hence (CER-FR)/FR=British Interest rate-US interest rate

i.e (0.76-0.67)/0.67=British Interest rate-0.1

British Interest rate=23.43%