International Business 10th Edition by Charles Hill

Exercise 2

The interest rate on South Korean government securities with one-year maturity is 4 percent, and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. government securities with one-year maturity is 7 percent, and the expected rate of inflation is 5 percent. The current spot exchange rate for Korean won is $1 =W1,200. Forecast the spot exchange rate one year from today. Explain the logic of your answer.