Question: 3. Answer the following questions regarding foreign exchange rates and interest rates: (15 pts.) a. If the spot exchange rate between USD-Euro falls and

3. Answer the following questions regarding foreign exchange rates and interest rates: (15 pts.) a. If the spot exchange rate between USD-Euro falls and interest rates in both countries remains constant, what does uncovered interest parity tell us about the market's expectation for that currency exchange rate in the future? b. If interest rates in the US increase and the spot exchange rate between the USD and the Euro remains the same, what does that tell us about the change in the expected future spot rate between the USD and the Euro?

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Answers a Falling USDEuro spot rate with constant interest rates Uncovered interest parity UIP suggests that in this scenariothe market expects the Eu... View full answer

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