suppose that in Japan the interest rate is 8 and inflation i

suppose that in Japan the interest rate is 8% and inflation is expected to be 3%. meanwhile, the expected inflation rate in france is 12% and the British interest rate is 14%. to the nearest whole number, what is the best estimate of the 1-year forward exchange premium (discount) at which the pound will be selling relative to the euro?

ANSWER. Based on the numbers, Japan\'s real interest rate is about 5% (8% 3%). From that, we can calculate France\'s nominal interest rate as about 17% (12% + 5%), assuming that arbitrage will equate real interest rates across countries and currencies. Since England\'s nominal interest rate is 14%, for interest rate parity to hold, the pound should sell at around a 3% forward premium relative to the French franc.

suppose that in Japan the interest rate is 8 and inflation i

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