The current interest rate in the United States is $4\%.$ The current interest rate in the European Union is

$2\%.$

a$.$ Assuming covered interest parity holds, what implications can you draw about the relationship

between the current dollar$/$euro spot rate $($e $($$$/))$ and the dollar$/$euro forward rate $($f$($$$/))?[$A

complete answer would first define the covered interest parity.$]$

b$.$ Given uncovered interest parity, by how much do investors expect the euro to change in the next

year? $[$Please show your work for full credit.$]$

c$.$ Given empirical evidence, which of these are more likely to hold in reality? Why?