Suppose the spot exchange rate is 1 =$1.10, the expected exchange rate one year in the future is 1 =$1.122, the dollar interest rate is 4%, and the euro interest rate is 2%.

b) To check for interest parity:

i)Calculate the expected dollar rate of return on dollar deposits.

ii)Calculate the expected dollar rate of return on euro deposits.

iii)Does interest parity condition hold?

c)Which currency deposits will the investors want to hold and how will the spot exchange rate change (find the new value) if:

I)The dollar interest rate increases to5%.

ii)The dollar interest rate remains4%, but the expected exchange rate changes to1 =$1.144

.d)If spot exchange rate is 1 =$1.10, the dollar interest rate is 5%, and the euro interest rate is 2%,and covered interest rate parity holds, what should be the forward exchange rate one year in the future?