Question

Derek Tosh and​ Yen-Dollar Parity.  Derek Tosh 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 1.099% for​ Japan, and 5.896​% for the US. The​ 360-day euro-yen deposit rate is 4.703​%,

and the​ 360-day euro-dollar deposit rate is 9.498​%.

a. Calculate whether international parity conditions hold between Japan and the United States.

b. Find the forecasted change in the Japanese​ yen/U.S. dollar​ (¥/$) exchange rate one year from now.

Answer 1

Solution:

a.

In the case of parity conditions, the future spot rate and equal to the forward rate, the implied rate from the international fisher effect and the rate implied by purchasing power parity. According to the calculations, the markets are in equilibrium parity.

Hence, the international parity conditions hold between the two countries.

-----------------------------------------------------------------------------------------------------------------------------------------------------------------

b. Forecasting change in exchange rate = (Current spot rate - Forward exchange rate)/Forward exchange rate

Forecasting change in exchange rate = (89 - 84.90)/84.90

Forecasting change in exchange rate = 0.048 or 4.80%