Question: a) Suppose the uncovered interest parity condition holds, and that the domestic interest rate is lower than the foreign interest rate. What does this imply about the current versus future expected currency value for the domestic country?
b) Assume that the one-year interest rate in the United States is 4% and that the one- year interest rate in Canada is 3%. According to uncovered interest rate parity, what does this imply about the current versus the future expected value of the US dollar? Explain.
c) Explain why a simple comparison of the interest rates on domestic and foreign bonds might provide misleading information about which bonds yield the highest expected returns.