Question 1:

The interest rate parity condition implies that

1. the domestic interest rate will equal the foreign interest rate plus a country-specific risk premium plus the expected rate of depreciation of the domestic currency.

2. the domestic interest rate will equal the foreign interest interest rate plus the expected rate of depreciation of the domestic currency if there is no risk.

3. the domestic interest rate will equal the foreign interest rate plus a foreign exchange risk premium plus the expected rate of depreciation of the domestic currency.

4. none of the above.

Choose the correct option.