The U.S. dollar exchange rate increased from $0.96 Canadian in June 2011 to $1.0

Question

The U.S. dollar exchange rate increased from $0.96 Canadian in June 2011 to $1.03 Canadian in June 2012, and it decreased from 81 Japanese yen in June 2011 to 78 yen in June 2012. The U.S. dollar exchange rate increased from $0.96 Canadian in June 2011 to $1.03 Canadian in June 2012, and it decreased from 81 Japanese yen in June 2011 to 78 yen in June 2012. The U.S. dollar exchange rate increased from $0.96 Canadian in June 2011 to $1.03 Canadian in June 2012, and it decreased from 81 Japanese yen in June 2011 to 78 yen in June 2012. The U.S. dollar exchange rate increased from $0.96 Canadian in June 2011 to $1.03 Canadian in June 2012, and it decreased from 81 Japanese yen in June 2011 to 78 yen in June 2012. 1.

1. If euro deposit in bank paris, france earns interest of 4% a yen and a yen deposit in tokyo, japan earn 5% a year everything else remaining the same and adjust for risk. What is the exchange rate expectation of the japanese yen?

Explanation / Answer

Note: 4% is assumed as US interest rate since Euro quotes are not given in the question.

Exchange rate expectation of the japanese yen = 78*(1+0.05)/(1+0.04) = 81.12 yen

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