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What is interest rate parity? Assume that the euro interest rate is constant at 2 percent,...

What is interest rate parity? Assume that the euro interest rate is constant at 2 percent, and that the expected exchange rate is 1.05 dollars per euro. Find the expected dollar return on euro deposits for the following cases:

(1)   The current exchange rate is 1 dollar per euro

(2)   The current exchange rate is 0.9 dollar per euro

(3)   The current exchange rate is 1.1 dollar per euro

Based on the interest rate parity, what will happen if the dollar interest rate is 1 percent if the current exchange rate is 1 dollar per euro?

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