1. Johnny Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 8 percent, while one-year interest rates in the U.S. are 5.5 percent. Johnny converts $100,000 to euros and invests them in Germany. The current spot rate is $1.2500/. One year later, he plans to convert the euros back to dollars.

1. If the spot rate in one year is $1.31/, what is Johnnys percentage return from his strategy?

2. If the spot rate in one year is $1.19/, what is Johnnys percentage return from his strategy?

3. 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 5.50%)