a. appreciate; 3%

b. appreciate; 1%

c. depreciate; 3%

d. depreciate; 2%

e. appreciate; 2%

E

Nominal rate = Real rate + Inflation.

Hence, inflation in US = 3% and inflation in Swiss = 1%

As the inflation is lower in Swiss, franc should appreciate by 3% – 1% = 2% against the dollar.

or

We know that Nominal rate = Real rate + Inflation.

Using the above formula,we can figure out

inflation in US= 3 %

Inflation in swiss=1 %

The expected future spot rate is calculated by multiplying the spot rate by a ratio of the foreign interest rate to domestic interest rate:

the Spot rate for swiss franck would be 1(1.06/1.04)=1.0192

the swiss franck will appreciate by 1.0192-1=.0192 or 2%

ANSWER: 2%