2. The one-year interest rate in dollars is 2.7% and the one-year interest rate in euros is 1.9%. The current spot exchange rate is $1.600/.

a) According to uncovered interest parity, what should we expect will happen to the exchange rate over the next year? (The euro should appreciate/depreciate x%.)

b) What is the currency carry trade? If uncovered interest parity holds, should investors expect to profit from the currency care trade?