Consider the opportunity to place 1 million Japanese Yen in either a -denominated or in a Korean Won () denominated bank deposit. The one-year interest rate is 3% on the yen bank deposits and 2% on the won bank deposits. The current spot exchange rate is 100 yen per won.

a) Assume that there are no arbitrage opportunities between these two investment opportunities when exchange rate risk is covered. Explain briefly what this implies for the forward exchange rate and calculate this eq'm one-year forward exchange rate.

b) Assume that the current spot exchange rate is at its equilibrium level. Explain what this assumption implies about the relation of the expected returns of the two investment opportunities. Calculate the percentage by which the yen is expected to depreciate or appreciate against the won over a year period. Calculate the value of the implied expected future spot exchange rate.

c) What is the relationship between the forward exchange rate and the expected future spot exchange rate if both covered and uncovered interest rate parity hold simultaneously? Are the results from parts A and B consistent with this relationship?

d) Events cause foreign exchange market participants to revise their expectations to a new future spot exchange rate of 110 yen per won. How do these events affect the current spot exchange rate and the one-year forward exchange rate (assuming both CIP and UIP hold after the adjustment). Calculate the new equilibrium values.