The 12-month nominal interest rate on the Indonesian rupiah is 8% and on the US

dollar is 3%. The spot exchange rate is 9,200 rupiahs per US dollar. There is no risk

premium.

(a) Compute the expected rupiah/dollar exchange rate one year from now. Give an

exact number.

(b) The interest rate on the US dollar increases from 3% to 4%. The expected

rupiah/dollar exchange rate does not change. What happens to the spot ru-

piah/dollar exchange rate? Compute an exact number. Take (a) as a starting

point for this question.

(c) There is a change in market expectations: because of the weakening US economy,

markets now expect the rupiah to depreciate by 1% less than previously thought.

What happens to the spot rupiah/dollar exchange rate? Give an exact number.

Take (a) as a starting point for this question.