Consider three countries, Balamb, Dollet, and Esthar, with currencies B$, D$, and E$, respectively. All three countries trade with one another. You live in Balamb and currently have B$500. The nominal interest rate in Balamb is iB = 0.011, the nominal interest rate in Dollet is iD = 0.060, and the nominal interest rate in Esthar is iE = 0.012. The spot rates are EB/D = 0.70 and EB/E = 1.19. The forward rates are FB/D = 0.68 and FB/E = 1.25.

For 5.3 - 5.5, suppose that covered interest rate parity holds. All of the values given in the question are unchanged except iB and EB/E, which are not known and must be solved. Further, suppose that 80% of Balamb's trade is with Dollet and 20% of Balamb's trade is with Esthar.

5.4 If uncovered interest rate parity were to hold as well, we can say that:

A Investors expect B$ to appreciate against D$ and depreciate against E$

B Investors expect B$ to depreciate against D$ and depreciate against E$

C Investors expect B$ to appreciate against D$ and appreciate against E$

D Investors expect B$ to appreciate against D$ and appreciate against E$