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Compute which of the two statements is correct

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Question 1: The one-year interest rates for the USD and EUR are: rUSD = 1% and rEUR = 5%. The expected USD/EUR rate for year = 1 is E (X1USD/EUR) = 1.12 and the current spot rate is X0USD/EUR = 1.08. Which of the following two statements is correct?

S1: Based on UIRP, the EUR is currently undervalued against the USD by 7.25%.

S2: Based on UIRP the USD is currently overvalued against the EUR by 7.25%

  1. S2 is correct but S1 is false
  2. Both statements are correct
  3. S1 is correct and S2 is false
  4. Both statements are false

Reference no: EM132482902

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