Spot foreign exchange market is in equilibrium

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Reference no: EM133674339

Question

Today the spot exchange rate E$/¥ is $0.0135 per Japanese yen, the 3-month forward exchange rate F$/¥ is $0.0125 per Japanese yen and the expected future spot rate Ee $/¥ in three months is $0.0118 per Japanese yen. Also, the 3-month interest rate on dollars is 2.0 percent and that on yens is 3.25 percent.

1. Use UIP's approximation to analyze whether or not the spot foreign exchange market is in equilibrium? If not, explain what market mechanism will bring the market back to an equilibrium.

Reference no: EM133674339

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