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The current exchange rate is 1 euro per dollar. If a euro-denominated bond is yielding 2% per-year and a dollar-denominated bond is yielding 1% per-
The current exchange rate is 1 euro per dollar. If a euro-denominated bond is yielding 2% per-year and a dollar-denominated bond is yielding 1% per- year.
(a) what is the UIP forecast about the future dollar/euro exchange rate under risk neutrality?
(b) If instead agents are risk-averse and European assets are considered more risky than US assets, how would your answer to (a) change?
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