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Suppose that both Korea (Home country) and France (Foreign country) produce exactly the same semi-conductor. Prices of the semiconductor in each country (denominated in Won and Euro, respectively) at given time t are Pt and Pt. Exchange rate at time t quoted in direct convention (Won/Euro) isEt.There are no transportation costs between the two countries, so French semiconductors can be imported without cost into Korea. However, the French impose a tariffon imported Korean semiconductors so that if a trader imports one box of semiconductors to France at pricePt she earns onlyPt(1).2

(a) Write the conditions thatPt,Pt,Et,must satisfy to rule out any arbitrage gains by semi conductor traders.(b) Show that the relative version of LOP (Pt+1Pt=Et+1EtPt+1Pt) holds between times t and t+ 1 if either Korea is the exporter in both periods or if France is the exporter in both periods. Hint: use the no-arbitrage bounds you derived in the last question.