Change in Forward Premium Over Time
Solve the following problem:
Assume that the one-year interest rate in the U.K. is 9 percent, while the one-year interest in the U.S is 4%. The spot rate of the pound is $1.50. Assume that interest rate parity exists. The quoted one-year interest in the U.K. is expected to rise consistently over the next month. Meanwhile, the quoted one-year interest rate in the U.S. is expected to decline consistently over the next month.
Assume that the spot rate does not change over the month. Based on this information, how will the quoted one-year forward rate change over the next month?