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In January 20X1, one-year interest rate on EUR and USD are 3% and 1% per year, respectively. The current spot exchange rate is $1.1820/. Q-1

In January 20X1, one-year interest rate on EUR and USD are 3% and 1% per year, respectively. The current spot exchange rate is $1.1820/.

Q-1 According to the IFE, what is the market expected spot exchange rate in a years time?

Q-2 If the European Central Bank unexpectedly announces a decrease in policy interest rate by 50 basis points from 3.00% to 2.50%, what would happen to the spot exchange rate immediately (assuming everything else constant)? Now, what is the difference between the current and expected future spot rate?

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