Consider the FX market between Malaysia and Thailand. The current spot exchange rate is 7 Malaysian ringgits per Thai baht, Eringgit/baht = 7. Assume ibaht = 1.50% and iringgit = 1.50%. Assume initially, UIP holds and Ee ringgit/baht =Eringgit/baht. Suppose the expected future exchange rate increases, Ee ringgit/baht = 8 and interest rates in both countries remain unchanged. State the initial value and the value after the expected future exchange rate increase for each of the below.

(i) expected rate of return on Thai deposits,

(ii) expected rate of return on Malaysian deposits,

(iii) spot exchange rate Eringgit/baht

Using the FX market model.