Answer the following questions concerning covered and uncovered interest rate differentials and parity conditions:

a. Suppose the spot dollar-euro exchange rate is $1.20/ , and the 60-day forward rate is $1.24/. Is the euro selling at a forward discount or premium? What about the dollar?

b. Now suppose the interest rates on one-year U.S. and Eurozone (EMU) bonds are rUS = 5% and rEMU = 3%. You expect that, one year from now, the dollar-euro exchange rate will be at $1.26/. Today the rate is $1.20/. Which should you invest in, the U.S. or EMU bond? Explain Hint use uncovered interest rate parity to get your answer.

c. Suppose the interest rate is 4% in the US and 8% in the UK. If the actual exchange rate is e = $2.00/1 (home is the US), what must the expected exchange rate ee be?