Consider the choice between investing in a bond issued by the Mexican government and denominated in Mexican pesos, versus investing in a bond issued by the German government and denominated in Euros. Assume that the Mexican bond yields an interest rate of ii, while the German bond yields an interest rate of i^*i. Assume, in addition, that investors perceive the bond issued by the Mexican government to have a higher probability of default than the bond issued by the German government. Then, according to the UIP condition:

a)ii should equal i^*i.

b)ii should exceed i^*i by the rate of expected depreciation of the Peso relative to the Euro.

c)ii should exceed i^*i by more than the rate of expected depreciation of the Peso relative to the Euro.

d)ii should exceed i^*i by less than the rate of expected depreciation of the Peso relative to the Euro.

e)impossible to determine.