The three-month dollar interest rate in New York is 5% per annum. Alternatively, the three-month euro interest rate in Frankfort is 8% p.a. The current $/ spot exchange rate is $1.1320/. The euro three-month forward rate is quoted at $1.1346/.

1. Using the Interest Rate Parity formula (IRP) find out if the interest rate parity condition is violated. If violated, at what 3-month forward rate would it hold?

2. Use the International Fisher Effect (IFE) to find what should be the expected three-month spot exchange rate of dollar against the euro (use interest rates up to four decimal places)

3. Assume that the real rate of interest in both the euro zone and the U.S. is 1.6% per annum; use the Fisher Effect (FE) to calculate the expected annualized three-month rates of inflation in the euro zone and the U.S