1. Presume the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate. What does this imply about the current versus future expected exchange rate? Describe.
2. Presume the one-year nominal interest rate is 2.0 percent in the United States and 5.0 percent in Canada. Should you hold Canadian bonds or U.S. bonds? Describe
3. Presume the CFO of a German corporation with surplus cash flow has one million Euros to invest. Suppose that interest rates on one-year CD deposits in US banks are 2 percent, while rates on one year CD deposits denominated in Euros in German banks are currently 4.5 percent. Suppose further that the CFO expects that the (euro/$) exchange rate will increase from 1euro per $ to 1.1 Euros per $ during the coming year. Should the CFO invest in CD's denominated in dollars or in Euros?