1.Assume that the one-year interest rate on U.S. dollars ($) is 5% and the one-year interest rate on euros (EUR) is 8%. You have $1,000,000 to invest for six months and you believe that the international Fisher effect holds. The euro's spot exchange rate is $1.40 (i.e., EUR 1 = $1.40). What will be the annualized yield on your investment if you invest in euros? (A) 2.5%. (B) 3.0%. (C) 5.0%. (D) 8.0%.

2.Assume that the one-year interest rate on U.S. dollars ($) is 3% and the one-year interest rate on Australian dollars (AUD) is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $1,000,000 to invest for one year and you believe that purchasing power parity holds. The spot exchange rate of an Australian dollar is $0.689 (i.e., AUD 1 = $0.689). What will be the yield on your investment if you invest in the Australian market? (A) 2.0%. (B) 3.0%. (C) 4.0%. (D) 6.0%