Uncovered interest rate parity condition

(a) State the uncovered interest rate parity condition.

(b) Consider an open economy with a domestic interest rate of it = 3% , a nominal exchange rate between the domestic and foreign economy of Et = 2 , and where the foreign interest rate is i t = 2%. In this case, according to the interest rate parity, what is the markets expectation of the future exchange rate E e t+1?

(c) Consider an open economy with a domestic interest rate of it = 5% , a nominal exchange rate between the domestic and foreign economy of Et = 1 , and where the foreign interest rate is i t = 10%. Calculate the expected appreciation or depreciation of the domestic currency according to the theory of "uncovered interest rate parity".

(d) Suppose it = 4%, i t = 2%, and that the domestic currency is expected to depreciate by 3% during the coming year. Given this information, would you expect individuals to hold only domestic bonds or only foreign bonds? Explain