Using an approximation to the UIP eqaution to determine the spot exchange rate, assume that the expected spot rate (after 1 year) for euros (in terms of dollars)= $1.50, the current interest rate on euro deposits is 2% and the current interest rate on dollar deposits is 6%. What current spot for euros would satisfy the equation?
a) $1.5*(1+2%)= $1.53
b) $1.5*(1-2%)= $1.47
c) $(1.5/(1+4%)= $1.442
d) $(1.5/(1-4%)= $1.563
Ans: c) $(1.5/(1+4%)= $1.442
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