If you are told that the following is true; Interest rate (2018) = Interest rate in 2017 + the rate of increase in prices in 2018 in each country. Use Interest Rate Parity Theorem and calculate 1-year forward rate between dollar and pound in 2018. Assume prices are expected to increase in the U.S. and U.K. at 10 and four percent in 2018, respectively.
Previous answers
Spot exchange rate (2017) = CPI(2016) * [(1 + U.S. Inflation rate) / (1 + U.K. Inflation rate)] = ($34/17 pounds) * [1.02/1.12] = $1.82/pound a one-year forward exchange rate between dollar and pound = 1.82*1.03/1.06 a one-year forward exchange rate between dollar and pound = 1.7685.