Japanese/Australia Parity Conditions. William Leon is attempting to determine whether Japanese and Australian financial conditions are at parity. The current spot rate is a flat ¥108.33/A$, while the one-year forward rate is ¥106.50/A$. Forecast inflation is 5.00%

for Japan and 6.80% for the Australia. The one-year Japanese yen deposit rate is 7.85%, and the one-year Australian dollar deposit rate is 9.70%.

a. Draw a diagram and calculate whether international parity conditions hold between Japan and Australia.

b. Find the forecasted change in the Japanese yen/

Australian dollar (¥/A$) exchange rate one year from now.