What will be an ideal response?
The current one-year domestic rate and future expected one-year domestic rates. Also, the current one-year foreign rate and future expected one-year foreign rates. And finally, some long-run nominal expected future exchange rate. Changes in the current one-year domestic and foreign rates have the same effect as described earlier. Changes in the future expected domestic rate will effect the exchange rate that is expected to occur at some point. This will affect the current exchange rate. The same type of analysis applies to the foreign rate. And finally, the long-run expected exchange rate will affect E as well in the same way it did before.