An American investor holds investments in both America and Muskville. Assume the following rates are given. Exchange rate: $1.75/ U.S. 90 day bond yield: 12% Muskville 90 day bond yield: 10% = $1.78/ in 90 days

a) Does interest rate parity hold? Show your work.

b) Assume that investors are able to change their expectations for appreciation. At what expected future spot exchange rate will parity hold? ( .) Round to the nearest cent.

c) In parity, if increases, what will happen to the current exchange rate?