Yen-Dollar Parity. Currency Trader Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat 89.00/$, while the 360-day forward rate is 84.90/$. 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 euro-dollar deposit rate is 9.500%.

Assumptions				Value
Forecast annual rate of inflation for Japan				1.100%
Forecast annual rate of inflation for United States				5.900%
One-year interest rate for Japan				4.700%
One-year interest rate for United States				9.500%
Spot exchange rate (/$)				89.00
One-year forward exchange rate (/$)				84.90

1. Compute the expected spot rate in 1 year based on relative purchasing power parity.

S2= s1 x (1+i^f)/(1+i^$)

= 89 x (1.011)/(1.059)

=84.97 ppp

compare to 84.90 market

2. Compute the real rate for both the U.S. and Japan.
3. Compute the expected spot rate in 1 year based on the international Fisher Effect.
4. Compute the expected 1 year forward rate based on interest rate parity.
5. Compare the given market 1 year forward rate to the calculations in a, c, and d.