1. Johnny Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one-year interest rates in the U.S. are 3.25 percent. Johnny converts $100,000 to euros and invests them in Germany. The current spot rate is $1.2530/. One year later, he plans to convert the euros back to dollars.

1. According to the IFE, what should the spot rate of the euro in one year be?

2. If the spot rate in one year is $1.2725/, what is Johnnys percentage return from his strategy?

3. If the spot rate in one year is $1.1875/, what is Johnnys percentage return from his strategy?

4. What is the minimum spot rate in one year for Johnnys strategy to be successful? (Success is defined as a dollar-denominated rate of return 3.25%)