1.This question is about the interest parity condition.

a.For the following cases, calculate the difference between the domestic (dollar) and foreign (euro) rates of return:

Dollar interest rate Euro interest rate Expected euro appreciation Difference

1 0.11 0.12 -0.03

2 0.12 0.1 0.02

3 0.13 0.14 0.01

4 0.04 0.09 -0.04

b.If the interest parity condition were to hold strictly, explain what would happen in each of the above situations?

c.For this part of the question, ignore the above information on "expected euro appreciation". If the covered interest parity condition were to hold strictly and the forward exchange rate is $1.5 per euro, then what is the spot exchange rate in each of the above situations?