Problem#1

a.Interest rates in Canada are currently at 7% and 10%in Italy. The real interest rate in both countries is the same at 3% and the C$/ E spot rate is $0.80 /E. Using PPP, what is the expected spot rate in tow years?

b.If the expected future spot rate in one year is $0.82/E and the inflation rate in Italy is constant, what is the expected Canadian interest rate in one Year?

c.Suppose the interest rate on Canadian investment is 7% and a similar Italian investment has an interest rate of 10%. The spot Rate is still $0.80 / E and the one- year forward rate is $0.7843. Calculate the Forward Premium or discount (round to two decimals).