According to Exhibit 6.5 on page 251 in the textbook, answer the following questions assuming covered interest rate parity holds in the long run.

1. Is dollar selling at a premium or discount against euro, pound, and yen in the forward market?

2. How is dollar premium or discount against each currency likely to change over different maturity dates?

Exhibit 6.5 Yield Curves for Four Currencies 4.5 4 3.5 2.5 Interest Rate 1.5 ----- 0.5 1 1 1 2 3 4 5 6 9 10 12 15 20 25 30 7 8 Maturity EUR JPY USD GBP Notes: The yield curve data are taken from swap rates (see Chapter 21) for different currencies reported in the Financial Times for January 18, 2011. These rates are comparable to yields to maturity for domestic bonds. On the vertical axis, the yields are expressed in annualized terms. The horizontal axis displays the maturity expressed in years