1. What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%?
2. What is the expected dollar rate of return on dollar deposits?
3. Does IP hold in this example?
4. What would happen to the $/ exchange rate? Will the euro appreciate or depreciate?
5. Calculate the equilibrium $/ exchange rate assuming all other variables remain constant.