4. Consider two countries: Japan and France. Suppose you saw thefollowing information in the newspaper: Interest rate on one-yearJapanese deposits = 8%; Interest rate on one-year French deposits =6%; Current spot rate: 100 yens per euro. Further suppose thatbased on your research on the two countries, you expect the spotrate is going to be 105 yens per euro a year fromnow. Round numbers to 3 decimal points. Pick home andforeign country and setup your equation appropriately
- Does uncovered interest parity (in exact form) hold?
- If not, at what current spot rate would the uncovered interestparity hold (be satisfied)?
- How might the current spot rate be driven to this level youfound in (b)? Explain. (Explain the adjustment mechanism thatoccurs through trade of currencies that makes arbitragedisappear).
