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  3. 4. consider two countries: japan and france. suppo

4. Consider two countries: Japan and France. Suppose you saw the following information in the newspaper:...

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Finance

4. Consider two countries: Japan and France. Suppose you saw thefollowing information in the newspaper: Interest rate on one-yearJapanese deposits = 8%; Interest rate on one-year French deposits =6%; Current spot rate: 100 yens per euro. Further suppose thatbased on your research on the two countries, you expect the spotrate is going to be 105 yens per euro a year fromnow. Round numbers to 3 decimal points. Pick home andforeign country and setup your equation appropriately

  1. Does uncovered interest parity (in exact form) hold?
  2. If not, at what current spot rate would the uncovered interestparity hold (be satisfied)?
  3. How might the current spot rate be driven to this level youfound in (b)? Explain. (Explain the adjustment mechanism thatoccurs through trade of currencies that makes arbitragedisappear).

Answer & Explanation Solved by verified expert
4.4 Ratings (862 Votes)
a As per uncovered interest parity the difference in interest rates should equal the change in exchange rate over the period Home country is France and foreign country is Japan For uncovered interest parity to hold future exchange rate    See Answer
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