What happen to forward exchange rate-unexpected interest cut, Microeconomics

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What happen to forward exchange rate-unexpected interest cut

Suppose the annual interest rate for a UK. money market instrument is 2% lower than the rate of a similar instrument in the U.S. If the forward exchange rate is 2.04 ($/£), according to the covered interest parity (CIP) condition,

a) What should be the spot exchange rate?

b) What may happen to the spot and forward exchange rate if there is an unexpected interest rate cut in the U.K.? Please explain how the equilibrium can be reestablished in the markets?

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Microeconomics: What happen to forward exchange rate-unexpected interest cut

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Microeconomics: What happen to forward exchange rate-unexpected interest cut

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Microeconomics: What happen to forward exchange rate-unexpected interest cut

Reference No:- TGS064961

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