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2. The 12-month nominal interest rate on the euro is 4% and on the US dollar is 3%. The spot exchange rate is 1.45 dollars
2. The 12-month nominal interest rate on the euro is 4% and on the US dollar is 3%. The spot exchange rate is 1.45 dollars per euro. The risk premium on the euro is 1%. (a) What is the expected dollar/euro exchange rate 12 months from now? Give an exact number. (b) Because of the increasing indebtedness of the US, the dollar is losing some of its attractiveness, and the risk premium on the curo decreases to 0.5%. If the spot exchange rate does not change, what will happen to the 12-month interest on the euro
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