Question: 2. (Ch. 5) Forward Premium. It is now on September 25. You observe the EURUSD spot exchange rate is 1.0670 and the 1-year forward exchange

2. (Ch. 5) Forward Premium. It is now on September 25.

2. (Ch. 5) Forward Premium. It is now on September 25. You observe the EURUSD spot exchange rate is 1.0670 and the 1-year forward exchange rate is 1.0850 . a. What is the annualized forward premium? (4 points) b. Based on the no-arbitrage condition, what is the approximate one-year interest rate differential between the U.S. and the euro area? ( 3 points) c. Which currency has a higher one-year interest rate? Why? (3 points) d. If you observe that the one-year spot interest rate for the EUR is 3%, what is the oneyear spot USD interest rate? (2 points)

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