1. The spot exchange rate for the Euro is $1.10 and the six-month forward rate is $1.06

a. Which is worth more, a U.S. dollar or a Euro?

b. Assuming absolute PPP holds, what is the cost in the United States of a bottle of water Perrier if the price in Europe is 2.10? Why might the water actually sell at a different price in the United States?

c. Is the U.S. dollar selling at a premium or a discount relative to the Euro?

d. Which currency is expected to appreciate in value?

e. Which country do you think has higher interest ratesthe United States or Europe? Please explain answers.