1. When you use the cross-exchange rate to verify the triangular arbitrage, how do you determine which currency is overpriced?
2. Suppose you observe a spot exchange rate of $1.50/euro. If the interests rates are 5% APR in a he US and 3% APR in the euro zone, what is the no arbitrage 1-year forward rate.
3. If the annual inflation rate is 5.5% in the US 4% in the U.K. Forecast how the exchange rate will move in the following year.