What financial adjustments would you expect to see

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Question: 1. You observe that the U.K. annual interest rate is 2.5 percent, the U.S. annual interest rate is 3.8 percent, the 3-month forward rate is $1.8180/£, and the spot rate is $1.8034/£. Assuming that transaction costs are 0.2 percent, are the financial markets in equilibrium?

2. Assume that the interest rate in the United Kingdom increases to 3.5 percent. What financial adjustments would you expect to see?

Reference no: EM132177227

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