Suppose that the uncovered interest rate parity holds and 1

Suppose that the uncovered interest rate parity holds, and

1) i-i^f= = -10%

2) exp (Et+1)=2

E is

A. 2.22

B. 0.55

C. 2

D. 1.81

Solution

Formula for uncovered interest parity is

i - i^f = (exp(E_t+1) /E) - 1

On putting the values given

-0.1 = 2/E - 1

0.9 = 2/E

E = 2/0.9 = 20/9 = 2.22

So the correct answer is A.

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