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Required return on risk-free government securities

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Suppose $1.25/£ and the 1-year forward rate is $1.20/£. The real interest rate on a risk-free government security is 2 percent in both the United Kingdom and the United States. The US inflation rate is 5 percent.

a. What is the UK's inflation rate if the equilibrium relationships hold?

b. What is the UK's nominal required return on risk-free government securities?

Reference no: EM131226779

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