Suppose that the U.S. dollar-pound sterling spot exchange rate equals $1.60/£, while the 360-day forward rate is $1.64/£. The yield on a one-year U.S. treasury bill is 9% and that on a one-year U.K. treasury bill is 8%. Calculate the covered interest differential in favor of London. On the basis of this result, which country would you expect to face capital inflows and which to face capital outflows?

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The Answer of Suppose that the U.S. dollar-pound sterling spot exchange rate equals $1.60/£, while the 360-day forward rate is $1.64/£. The yield on a one-year U.S. treasury bill is 9% and that on a one-year U.K. treasury bill is 8%. Calculate the covered interest differential in favor of London. On the basis of this result, which country would you expect to face capital inflows and which to face capital outflows?

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