4. Consider two countries: Japan and France. Suppose you saw the following information in the newspaper: Interest rate on one-year Japanese deposits = 8%; Interest rate on one-year French deposits = 6%; Current spot rate: 100 yens per euro. Further suppose that based on your research on the two countries, you expect the spot rate is going to be 105 yens per euro a year from now. Round numbers to 3 decimal points. Pick home and foreign country and setup your equation appropriately

1. Does uncovered interest parity (in exact form) hold?
2. If not, at what current spot rate would the uncovered interest parity hold (be satisfied)?
3. How might the current spot rate be driven to this level you found in (b)? Explain. (Explain the adjustment mechanism that occurs through trade of currencies that makes arbitrage disappear).