1. The interest rate on South Korean government securities with one-year maturity is 4 percent, and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. government securities with one-year maturity is 7 percent, and the expected rate of inflation is 5 percent. The current spot exchange rate for Korean won is $1 = W1,200. Forecast the spot exchange rate one year from today. Explain the logic of your answer. The formula for International Fisher Effect is [(S1 - S2)/S2] x 100 = i$ - iw Given iw = 4 and i$ = 7 The current exchange rate for Koreas won is $1 = w1,200 So S1 = 1200 [(1200-S2)/S2] x 100 = 7 -4 1200/S2 - 1 = 3/100 1200/ S2 = 0.03 + 1 = 1.03 $2 = 1200 / 1.03 = 1165.04 Therefor the exchange rate one year from today will be $1 = w1165