Spot and Forward Rates: Suppose the exchange rate for the Swiss franc is quoted as SF $1\mathrm{.}09$ in the spot market and SF $1\mathrm{.}11$ in the $90-$day forward market.

I. Is the dollar selling at a premium or a discount relative to the franc?

II$.$ Does the financial market expect the franc to strengthen relative to the dollar? Explain.

III. What do you suspect is true about relative economic conditions in the United States and Switzerland?

B$.$ Purchasing Power Parity: Suppose the rate of inflation in Mexico will run about $3$ percent higher than the U$.$S$.$ inflation rate over the next several years. All other things being the same, what will happen to the Mexican peso versus dollar exchange rate? What relationship are you relying on in answering?