The diagram below depicts the international Fisher Effect (IFE). f is the percentage change in the value of the foreign currency expressed in units of the domestic (home) currency, rh is the domestic interest rate, and rf is the foreign interest rate.

1Briefly explain what IFE is.

2What situations do points A, B, C, and D in the diagram below depict? For each point, state the arbitrage opportunity that may exist and how a domestic investor would benefit from it.

th-r(%) IFE line D B H H t ef A C