Where i is the domestic interest rate i the foreign

Question

The interest rate parity relation can be represented by the following equation:

1 + i = (1 + i*) E/E^e

where i is the domestic interest rate, i* the foreign interest rate, E and E^e are the actual and expected exchange rate, respectively. Referring to this equation as needed, explain why investors pay attention to the exchange rate when making investments across countries.