Answer:
1. The markets are indeed in equilibrium parity
. International parity conditions hold between Japan and the United States
2. The forecasted change in the Japanese Yen/U.S. dollar is 4.8%
Explanation:
1. According to th given data we have the following:
Forecast annual rate of inflation for japan = 1.101%
Forecast annaual rate of inflation for US =5.905%
One-year interest rate for Japan = 4.704%
One-year interest rate for United States =9.505%
Spot exchange rate (¥/$)89.00
One-year forward exchange rate (¥/$) = 84.90
The forecast difference in rates of inflation = 1.101% - 5.905% = -4.8% (US higher than Japan)
The difference in nominal interest rates = -4.8% (higher in United States)
The forward premium on foreign currency = 4.8% (Japanese yen at a premium)
The forecast change in spot exchange rate = (89 - 84.90) / 84.90 * 100 = 4.8% (Dollar expected to weaken)
As is always the case with parity conditions, the future spot rate is implicitly forecast to be equal to the forward rate, the implied rate fromthe international Fisher effect, and the rate implied by purchasing power parity. Therefore, The markets are indeed in equilibrium -- parity
2. In order to Find the forecasted change in the Japaneseyen/U.S. dollar (¥/$) exchange rate one year from now we would have to use the following formula:
= (Current Spot Rate - Forward Exchange Rate) / (Forward Exchange Rate)
= (89 - 84.90) / 84.90 *100
= 4.8%
The forecasted change in the Japanese Yen/U.S. dollar is 4.8%
