Question

Heidi Jensen is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward rate is ¥84.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day yen deposit rate is 4.700%, and the 360-day dollar deposit rate is 9.500%.

Calculate whether interest rate parity, purchasing power parity, and international fisher effect conditions hold between Japan and the US.

Find the forecasted change in the Japanese yen/US dollar exchange rate one year from now.

Answer 1

a. International Fisher Effect:-

Difference in Nominal Interest Rate = -4.8% (High in U.S)

Change Forecasted in Spot Rate = 4.8% (Dollaar Expected to weaken)4

b. Interest Rate Parity:-

Forward Rate Premium = 4.8%(Japanese Yen at Premium)

Difference in Nominal Interest Rate = -4.8% (High in U.S)

c. Fisher Effect:-

Difference in Nominal Interest Rate = -4.8% (High in U.S)

Difference in Inflation Rate = -4.8% ( Higher in Us than Japan)

The Markets are in equilibrium parity. Future Spot Rate is expected to be Equal to Forward rate, forward rate as per International Fisher Effect and implied rates by Purchasing Power Parity

Calculation Of Forecasted Change:-

Forecated Change = Spot Rate - Forward Exchange Rate

=$89- $84.90

= 4.8%