Sweden UK Spot exchange rate BP 0.09697/krona krona 10.3125/BP Expected inflatio

Question

Sweden                                UK

Spot exchange rate                               BP 0.09697/krona                    krona 10.3125/BP

Expected inflation rate                               .5%pa                                            N/A

Nominal interest rate                                   .9%p.a                                       2.2%

1) What is expected rate of inflation for uk next year? (Here using the Fisher effect)

2) what is your estimate of the one year forward exchange rate between the krona and british pound? [Here i know that you need to use nominal interest rates].

Please show and explain both clearly

Explanation / Answer

1) expected inflation rate = .5-0.9+2.2 = 1.8

2) forward exchabge rate = 0.09697(1.04) = 0.10084

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