Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro.Further,assume that the spot exchange rate is $1.05 per euro,and the interest rate on dollar deposits is 10 percent and on euro it is 4 percent.Under these assumptions

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Interest parity holds when the forward exchange rate is equal to the expected future spot exchange rate. In this case, the forward rate is $1.113 per euro and the spot rate is $1.05 per euro. If we assume that the expected future spot rate is equal to the current spot rate, then the forward rate is a good estimate of the future spot rate. Therefore, interest parity holds. Specifically, we can use interest rate parity to calculate the expected future spot rate as follows:

Expected future spot rate = spot rate x (1 + foreign interest rate) / (1 + domestic interest rate)
Expected future spot rate = $1.05 x (1 + 0.04) / (1 + 0.10) = $1.0845 per euro

Since the forward rate is $1.113 per euro, which is greater than the expected future spot rate of $1.0845 per euro, the dollar is expected to appreciate against the euro over the next year.

Suppose That the One-Year Forward Price of Euros in Terms