I) The European Monetary Authority is considering issuing a new 3-month bond denominated in "Euros" which will pay a 4% annual interest rate. The current issue of 3-month Canada Savings Bonds pays 3.6% annually.

a) If the current exchange rate is 2.5 Canadian Dollars per Euro and the 3-month forward exchange rate is 2.48 Canadian Dollars per Euro, should a resident of Canada invest in the Canada Savings Bond or in the Euro-bond? Explain.

b) Assuming that the new Euro-bond is issued with a 4% annual interest rate, in which direction would you expect Canadian interest rates and the Canadian Dollar-Euro spot exchange rate to change? Explain.

c) Again, assuming that the new Euro-bond is issued with the 4% annual interest rate, what value for the 3-month forward exchange rate would be consistent with a zero Covered Interest Arbitrage Margin? Explain.

II) Consider the following data from the United States and Canadian economies. See attached screenshot

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