Using the UIP Equation to Determine the Spot Exchange Rate

question 8

Multiple Choice

Using the UIP equation to determine the spot exchange rate, assume that the expected spot rate (after one year) for euros (in terms of dollars) equals $1.50, the current interest rate on euro deposits is 4.5%, and the current interest rate on dollar deposits is 5.5%. Which of the following current spot rates would satisfy the equation?

• A) $1.65
• B) $1.50
• C) $1.485
• D) $1.25

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