4. Suppose that you are an investor based in New Zealand, and you expect the U.S. dollar to depreciate by 1.25% over the next year. The interest rate on one-year risk-free bonds is 2.25% in the United States and 3.75% in New Zealand. The current exchange rate is NZD 1.38 per USD.

(a) Calculate the foreign currency risk premium from the New Zealand investors viewpoint. (3 marks)

(b) If the CIP condition holds, is the NZD dollar selling at a premium or discount compared to USD? By how much? (4 marks)

(c) What is the domestic currency return (from the New Zealand investors viewpoint) on the U.S. bond, assuming that the New Zealand investors expectations are met? (4 marks)