1. Denote the spot euro rate (/$) by S, the forward euro rate (/$) by F, and the forward premium by p. The dollar interest rate is denoted by i_$, which is equivalent of home interest rate, and the euro interest rate is denoted by i, which is equivalent of foreign interest rate. Which of the following is not a formal statement of IRP for the dollar/euro exchange rate?

a. (1 + i_$)/(1 + i) = F/S

b. (1 + i_$)/(1 + i) = 1 + p

c. p = (1 + i_$)/(1 + i) - 1

d. (1 + i_$)/(1 + i) = 1 - p

2, Suppose that the one-year interest rate is 3.5 percent in the United States; the spot exchange rate is $1.16/; and the one-year forward exchange rate is $1.18/. What must the one-year interest rate be in the eurozone to avoid arbitrage?

a. 1.72%

b. 1.75%

c. 4.79%

d. 5.28%

Suppose that the one-year interest rate is 2.5 percent in the United States and 1.5 percent in France (eurozone), and the spot exchange is $1.15/. What must the one-year forward exchange rate be to avoid an arbitrage opportunity?

a. 1.1385

b. 1.1388

c. 1.1613

d. 1.1964