You observe the following current rates: Spot exchange rate: $0.01/yen.

$1.49 Excluding Tax

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QUESTION:

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 bonds: 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 candidate whom international investors view as the stronger and more pro-business 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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