Posted: March 7th, 2017
You observe the following current rates:
Spot exchange rate : $0.01 / yen
Annual interest rate on 90 day U.S. dollar denominated bonds:4%
Annual interest rate on 90 day yen denominated:4%
a) If uncovered interest parity holds,what spot exchange rate do investors expect to exist in 90 days?
b) A close U.S. presidential election has just been decided. The cndidate whom international investors view as the stronger and more probusiness person won.Because of this, investors expect the exchange rate to be $0.0095 / yen in 90 days.What will happen in the foreign exchange market?
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