Spencer Adam Celine Eric. FACTORFACTOR IN GREAT BRITAINOUTCOME Relative Interest Rate In Project #3 we predicted an increase in the interest rate A strengthened.

Spencer Adam Celine

Eric

FACTOR FACTOR IN GREAT BRITAIN OUTCOME

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.(http://news.bbc.co.uk/)

A weakened GBP

Safe Haven Effect If 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: $1.6462 6 month: $1.6390 1 year: $1.6250

Spot GBP/USD 1.6496 United Kingdom Inflation is 2.2% United States Inflation is –1.01% Annual change in GBP 1.6496 x .0321

= .053 1 year spot 1.6496 – .053 = $1.5966 6 month spot 1.6496 – (.053/2) = $1.6231 3 month spot 1.6496 – (.053/4) = $1.6364

Current Exchange Rate = $1.6496 Current US Interest Rate = .2% Current UK Interest Rate = .5% 1 year change = 1.6496 *

(.005-.002) = .0049 3 month forecast = $1.6560 6 month forecast = $1.6549 1 year forecast= $1.6534

Forecasting Model(Rate as of 6/26 was $1.6496)

3 months 6 months

Asset Choice Weaken$1.6462

Weaken$1.6390

PPP Weaken$1.6364

Weaken$1.6231

IFE Strengthen $1.6560

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 HedgeUse 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 month Safer to HedgeUse a Forward Contract to lock in a higher price

Pound is going to depreciate so hedging not a concern

http://news.bbc.co.uk/2/hi/uk_news/politics/8123723.stm

http://tradingeconomics.com/

http://bloomberg.com/