Suppose that the interest rate is i = 10% in New York and i* = 6% in
Question:
(a) Indicate why the condition for uncovered interest parity (UIP) is satisfied.
(b) Explain what would happen if there was a change in expectations so that the spot rate in three months became $1.02/€ and the interest rate differential remained unchanged.
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a The condition for uncovered interest parity is given by i i EA where EA is the expected appreciati...View the full answer
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