1. Given the following values for U.S. and euro interest rate and the current exchange rate. Calculate the expected exchange rate so that interest parity holds. Also, calculate the expected change in the exchange rate 40% 4,0% 4.0% 6.0% 6.0% 60% 3.0% 4.0% 5.0% 3.0% 4,0% 50% 1.2 1.2 1.2 1.2 1.2 1.2 Suppose Rs-10%, R#2 15%, ES/E]s 135/E, and ESS/EJ the return on dollar deposits and pound deposits. If not, what do you think U.S. and British investors would do? What do you think will happen to RS, RE, and ES/E]? 2. 1.25/E. Does interest parity hold? what is 3. Imagine that everyone in the world faces a tax of t percent on interest earnings and on any capital gains due to exchange rate changes. How would such a tax alter the analysis of the interest parity condition? The interest parity condition will become (explain your reasoning): Now, suppose the tax applies to interest earnings but capital gains on exchange rate changes are untaxed. How would we modify the interest parity condition (explain your reasoning)? 4. Suppose a bond issued by the European Central Bank and denominated in euros pays 7%/year. Today the exchange rate is 1.63S/. It is expected exchange rate next year will be $1.79/. What is the annual dollar ceturn on this bond? 5, Suppose the interest rate on a euro deposit is 6% and the euro is expected to depreciate against the dollar by 1%, what does the interest parity condition say about the interest rate on a deposit in US. dollars