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Suppose E$/£ = 1

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Suppose E$/£ = 1.54 and an American investor expects the exchange rate to increase to 1.62 in a year's time. If the British interest rate is 3.2 percent, then what should be the American interest rate for the interest rate parity (IRP) to hold? If the U.S. and England followed fixed exchange rate regimes, such that the exchange rate was fixed at 1.54, would the American interest rate (satisfying IRP) be different?

a. 9.57 percent; 3.2 percent 

b. 8.56 percent; 8.56 percent

c. 8.56 percent; 3.2 percent

d. 9.57 percent; 9.57 percent

e. 8.56 percent; 9.57 percent