6) We assume the expected inflation in Sweden is 0.1% and the real interest rate is the same in Sweden and Iceland. In addition, the same conditions as in previous exercise (4) apply (spot price 0.0592; 1 year interest rate in Sweden is 0.5% and in Iceland 8.5%). Start the answering by explaining the parity you need to rely on to answer the questions.

a) What is the expected inflation in Iceland? b) What is the forward rate? c) What is the expected spot-price in one year? d) Is it a forward premium or forward discount?

Use the international 5 parities and explain why you choice the one being used by choice in order to solve the questions.