3.1 The diagram below shows the foreign exchange (FX) market in which the Canadian dollar is traded for euros. The FX market equilibrium is currently in equilibrium at point 1 in the diagram with an equilibrium dollar/euro exchange rate of $1.54 (E¹_$/? = 1.54).

return on dollar deposits ESE Elsie = 1.54 expected return on euro deposits Rates of return (in dollar terms) Rs=0.02