Today, the annual interest rate on bank deposits is 8.15% in New York and 3% in Paris, the spot exchange rate is 1.2 US dollars per euro, and the one-year forward exchange rate is 1.236 US dollars per euro. Emily plans to deposit 1,000 US dollars in either New York or Paris for one year. Answer the following questions, using the exact equations for the UIP/CIP.

(a). Where should Emily deposit her funds? Given today's spot exchange rate and interest rates, what is the equilibrium forward rate, if covered interest parity (CIP) holds? Report the intermediate steps. 

(b). Suppose the forward rate takes the value given by your answer to question (a). If UIP also holds, is the US dollar expected to appreciate or depreciate against the euro over one year? By how much? Report the intermediate steps

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a To determine where Emily should deposit her funds and calculate the equilibrium forward rate under ... View the full answer