Please show in steps for clarity.
Problem: In Britain, 90 day investments have a 4 % annualized return. In the US, 90 day investments of similar risk have a 1% annualized return. In the 90 day forward market, 1 British pound equals $1.66. Also, 1 British pound equal 1.16 Euros.
a. If interest rate parity holds, what is the spot exchange rate?
b. Which currency is selling at a premium? Why?
c. What is the cross rate between Dollars and Euros?
$1.00 = € Euros.