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Problem 6.3 Japanese/United States Parity Conditions Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat 89.00/$, while the 360-day forward rate is $84.90/6. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day euro-yen deposit rate is 4.700%, and the 360-day curo-dollar deposit rate is 9.500%. a. Diagram and calculate whether international parity conditions hold between Japan and the United States. b. Find the forecasted change in the Japanese yes/U.S. dollar (W/$) exchange rate one year from now. Assumptions Forecast annual rate of inflation for Japan Forecast annual rate of inflation for United States One-year interest rate for Japan One-year interest rate for United States Spot exchange rate (V/S) One-year forward exchange rate (V/$) y Giro ! Sa Value 1.100% 5.900% 4.700% 9.500% 89.00 84.90 1. 489% 4849/46 Frind F1360? 2. T? 3.2"? 2. S2 3. T4 = 5.9% 4. i* = 4.5% a. Approximate Form Forward rate as an unbaised predictor (E) Forecast change in spot exchange rate 4.8% Dollar expected to weaken) 4 Purchasing power parity (A) Forward premium on foreign currency 4.8% International Fisher Effect (C) Forecast difference in rates of inflation -4.8% (US higher than Japan) (Japanese yen at a premium) i Interest rate Fisher parity (D) Difference in nominal interest rates -4.8% (higher in United States) effect (B) As is the always the case with parity conditions, the future spot rate is implicitly forecast to be equal to the forward rate, the implicd rate from the international Fisher effect, and the rate implied by purchasing power parity. According to Yazzie's calculations, the markets are indeed in equilibrium -- parity. b. Spot exchange rate (V/S) One-year forward exchange rate (/S) Forcasted change in exchange rates 89.00 84.90 4.8% (Current Spot Rate - Forward Exchange Rate) / (Forward Exchange Rate) Problem 6.3 Japanese/United States Parity Conditions Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat 89.00/$, while the 360-day forward rate is $84.90/6. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day euro-yen deposit rate is 4.700%, and the 360-day curo-dollar deposit rate is 9.500%. a. Diagram and calculate whether international parity conditions hold between Japan and the United States. b. Find the forecasted change in the Japanese yes/U.S. dollar (W/$) exchange rate one year from now. Assumptions Forecast annual rate of inflation for Japan Forecast annual rate of inflation for United States One-year interest rate for Japan One-year interest rate for United States Spot exchange rate (V/S) One-year forward exchange rate (V/$) y Giro ! Sa Value 1.100% 5.900% 4.700% 9.500% 89.00 84.90 1. 489% 4849/46 Frind F1360? 2. T? 3.2"? 2. S2 3. T4 = 5.9% 4. i* = 4.5% a. Approximate Form Forward rate as an unbaised predictor (E) Forecast change in spot exchange rate 4.8% Dollar expected to weaken) 4 Purchasing power parity (A) Forward premium on foreign currency 4.8% International Fisher Effect (C) Forecast difference in rates of inflation -4.8% (US higher than Japan) (Japanese yen at a premium) i Interest rate Fisher parity (D) Difference in nominal interest rates -4.8% (higher in United States) effect (B) As is the always the case with parity conditions, the future spot rate is implicitly forecast to be equal to the forward rate, the implicd rate from the international Fisher effect, and the rate implied by purchasing power parity. According to Yazzie's calculations, the markets are indeed in equilibrium -- parity. b. Spot exchange rate (V/S) One-year forward exchange rate (/S) Forcasted change in exchange rates 89.00 84.90 4.8% (Current Spot Rate - Forward Exchange Rate) / (Forward Exchange Rate)