a) X₀^USD/EUR = 1.05; r^USD = 2%; r^EUR = 7%; E (X₁^USD/EUR) = 1.16; According to the UIRP, the short-run intrinsic value of the EUR is ________ ; this means that the EUR is currently ____________ relative to the USD.

Option 1: 1.2169; undervalued

Option 2: 1.1982; overvalued

Option 3: 1.1982; undervalued

b) Currently the USD/EUR spot exchange rate is: X₀^USD/EUR = 1.24; we also have the following one-year interest rates: r^USD = 5% and r^EUR = 2%. If you assume that the UIRP condition holds at time = 0 and time = 1 then the expected USD/EUR: E (X₁^USD/EUR) =

Option 1. 1.2765

Option 2. 1.3129

Option 3. 1.2423