Use the example below to decide if global investors prefer Yen or Dollar denominated assets for the next year. The time horizon is 1 year (for interest rates and future exchange rates.) Show all calculations and explain in words.

Interest rates on dollar-denominated assets = 5%

Interest rates on yen-denominated assets = 2%

Spot exchange rate = E = 110yen/$1

Expected future spot exchange rate = E^e = 95yen/$1