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The one - year interest rate is 6 % in the U . S . and 4 % in the Eurozone. On the other hand,

The one-year interest rate is 6% in the U.S. and 4% in the Eurozone. On the other hand, the one-year inflation is 4% in the U.S. and 1% in the Eurozone. The spot exchange rate is $1.50.
a) When the 1-year forward market exchange rate is $1.60?. Figure out the one-year forward premium/discount for euro. (20points)
b) What is the equilibrium one-year forward exchange rate based on Interest Rate Parity (IRP)?(20points)
c) What is the equilibrium one-year forward exchange rate based on Purchasing Power Parity (PPP)?(20points)
d) Given the difference between the forward market exchange rate of $1.60 and the equilibrium forward exchange rate based on IRP or PPP,
i) Which currency is underpriced/undervalued on the forward market? Dollar or euro? (20points)
ii) Which position do you want to take on the forward market? A long position or short position for euro? (20points)
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