Show how the equation in covered interest parity is derived, Business Economics

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Show how the equation in covered interest parity is derived

Covered Interest Parity

a. Show how the equation in covered interest parity is derived. Explain the theory.

b. Assume the current $/Euro exchange rate on the $/Euro exchange rate on the FORWARD market is 1.05 dollars per Euro. If the US interest rate is 6% and the EU interest rate is 10%, show what the current $/Euro SPOT market exchange would be under the theory of covered interest rate parity.

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Business Economics: Show how the equation in covered interest parity is derived

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