Question: 4 Suppose that In Mt+1 = -rt - 2 It - Vtet is the log domestic SDF where rt is the domestic risk-free short rate,

4 Suppose that In Mt+1 = -rt - 2 It -

4 Suppose that In Mt+1 = -rt - 2 It - Vtet is the log domestic SDF where rt is the domestic risk-free short rate, et ~ N(0, 1), and It is the domestic investors' risk-aversion at time t. Similarly, H In M++1 = NO is the log foreign SDF where rt is the foreign risk-free short rate, et ~ N(0, 1), and y is the foreign investors' risk-aversion at time t. Then, derive the uncovered interest rate parity (UIP) equation using the two SDFs

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