Question 3: Foreign Exchange Market Suppose on 1 January 2022 interest rate in US (home country) was 0.25% and in Japan was -0.1%, whereas the spot exchange rate was 115 ¥/$. On 15 June 2022, US increased interest rate to 1.75% while Japan interest rate remained the same, the Japanese exchange rate depreciated from 115 ¥/S to 137 ¥/$. (*Using proper diagram(s) and interest rate parity condition) A) Explain why exchange rate changed from 115€ per dollar to 137¥ per dollar. B) With US inflation reached new 40-year high in June 2022 of 9.1%, it is expected that US will keep increasing her interest rate toward the end of this year. a) How the expectation will affect the current spot exchange rate?

International Financial Management
14th Edition
ISBN:9780357130698
Author:Madura
Publisher:Madura
Chapter7: International Arbitrage And Interest Rate Parity
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Question 3: Foreign Exchange Market
Suppose on 1 January 2022 interest rate in US (home country) was 0.25% and in Japan was
-0.1%, whereas the spot exchange rate was 115 ¥/$. On 15 June 2022, US increased interest rate to
1.75% while Japan interest rate remained the same, the Japanese exchange rate depreciated from 115
\/S to 137 \/$. (*Using proper diagram(s) and interest rate parity condition)
A) Explain why exchange rate changed from 115¥ per dollar to 137* per dollar.
B) With US inflation reached new 40-year high in June 2022 of 9.1%, it is expected that US will keep
increasing her interest rate toward the end of this year.
a) How the expectation will affect the current spot exchange rate?
b) If you have $1000 for investment in USD or Japanese Yen deposit till the end of this year, how
would you invest your $1000 now?
Transcribed Image Text:Question 3: Foreign Exchange Market Suppose on 1 January 2022 interest rate in US (home country) was 0.25% and in Japan was -0.1%, whereas the spot exchange rate was 115 ¥/$. On 15 June 2022, US increased interest rate to 1.75% while Japan interest rate remained the same, the Japanese exchange rate depreciated from 115 \/S to 137 \/$. (*Using proper diagram(s) and interest rate parity condition) A) Explain why exchange rate changed from 115¥ per dollar to 137* per dollar. B) With US inflation reached new 40-year high in June 2022 of 9.1%, it is expected that US will keep increasing her interest rate toward the end of this year. a) How the expectation will affect the current spot exchange rate? b) If you have $1000 for investment in USD or Japanese Yen deposit till the end of this year, how would you invest your $1000 now?
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