Question

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.

Answer 1

Answer:

W1,224

Explanation:

Fa/b/Sa/b=1+ra%/1+Rb%

Where a and b are currency of south Korea and U.S

ra% is interest rate of south Korea

rb% is interest of U.S

F is forward rate

S is spot rate

Fa/b/1,200=1+4%/(1+2%)

Fa/b=1200+1200*4%/1.02

Fa/b=(1200+48)/1.02

Fa/b=1,224