An investor who expects the spot for the American dollar to devaluate e ex=1.

25/ϵ while the spot

e=1.12/ϵ. If the US securities pay interest of 3% while European securities pay interest of 0.75% answer
the following questions.

1. How can a speculator make profit using u covered financial investment? [CDeuro=
(1.0075)x1.25/1.12 – 1.03]
2. What pressure will this put on the dollar? [supply of $ will increase, so $will devaluate (e will
increase here)]
3. What will be the spot exchange rate equilibrium as a result of the preceding part? [we have to
calculate CD=0 and find e while using the e expected and to find e=1.22]

Given that the price coal in Russia is 6000 rubbles whereas coal is priced at $10 in the US. According to
the purchase power parity theory, what is the long run expected exchange rate for the e=rubble/$? If
next year the inflation rate will be 3% in Russia and 1.5% in the US, what is the expected exchange rate
next year eex according to relative ppp theory?

[6,000=e10 -> e=rubbles60/$

3%=e+1.5%

e=1.5%

expected=600x1.015