Consider two assets: one denominated inUS dollars and the other denominated in Canadian dollars. Assumefloating exchange rates, no restrictions on international capitalflows, risk-neutral...

Consider two assets: one denominated in US dollars and the other denominated in Canadian dollars. Assume floating exchange rates, no restrictions on international capital flows, risk-neutral investors, and no price rigidity. Suppose the spot exchange rate is denoted by E_$/CD, the expected exchange rate is denoted by E^e
_$/CD, the forward exchange rate is denoted by F_$/CD, and the interest rates on the US and Canadian assets are denoted by R^$
and R^C, respectively.

Consider the uncovered interest parity condition

Initial conditions:

Suppose the dollar interest rate = 6 %, the Canadian dollar interest rate = 6% (i.e., R^$
= .06 and R^C
= .06) and the expected future exchange rate = $1 per Canadian dollar.

a.What is the spot exchange rate, E_$/CD? Assuming that interest rates and expectations about the future exchange rate remain unchanged, will the spot exchange rate change over time?