Suppose the following quotations are available:

Spot rate Lit/US$ 1355 Eurocurrency market Italian Lira 5.50% U.S. Dollar 5.00% I. [ 5 points] What should be the one-year forward rate that will satisfy the Interest Rate Parity?

II. Suppose the one-year forward rate is Lit/$ 1365 today instead of the number you obtained in [I]. A.[ 5 points]

Given the numbers for the Italian interest, spot and forward rates as above, is the Italian Lira undervalued or overvalued in the forward market? Justify!

(a). UNDERVALUED [ ] (b). OVERVALUED [ ]