Spencer Adam Celine Eric

FACTORFACTOR IN GREAT BRITAINOUTCOME Relative Interest Rate In Project #3 we predicted an increase in the interest rate A strengthened GBP Interest Rate Differential If differential between US and GB increases in favor of GB then the pound becomes a more attractive currency. But based on Project #3 we predicted an increase in US interest rates as well. The differential will remain about equal. No significant change in currency Political Risk The GBP is greatly tied to political events. If there is political stability the pound will maintain its current rate or strengthen. Gordon Brown just released his policy “for growth” for next year. David Cameron, major opponent, has lead significant anti- Brown campaign and anticipates a turbulent next election. ( A weakened GBP Safe Haven EffectIf the political situation in Britain worsens, the safe haven effect will work against GBP as countries will sell the pound on the FX market. A weakened GBP 3 month: $ month: $ year: $1.6250

 Spot GBP/USD  United Kingdom Inflation is 2.2%  United States Inflation is –1.01%  Annual change in GBP x.0321 =.053  1 year spot –.053 = $  6 month spot – (.053/2) = $  3 month spot – (.053/4) = $1.6364

 Current Exchange Rate = $  Current US Interest Rate =.2%  Current UK Interest Rate =.5%  1 year change = * ( ) =.0049  3 month forecast = $  6 month forecast = $  1 year forecast= $1.6534

Forecasting Model (Rate as of 6/26 was $1.6496) 3 months6 months Asset Choice Weaken $ Weaken $ PPP Weaken $ Weaken $ IFEStrengthen $ Strengthen $1.6549

Because the UK inflation rate is currently at a good target rate of 2.2% which eliminates some degree of risk. Long Position -a stronger GBP is better Short Position -a weaker GBP is better 3 month Safer to Hedge Use a Forward Contract to lock in a higher price because we will get more $ when we convert GBP to USD Pound is going to depreciate so hedging not a concern because when the GBP is weak, it will take less dollars to convert to the pounds we have to pay 6 monthSafer to Hedge Use a Forward Contract to lock in a higher price Pound is going to depreciate so hedging not a concern