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A. Problems (mandatory) 1. The inflation rate in the US is 6% and in Japan it is 11%. If you know that the spot exchange rate
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Answer #1

If the exchange rate differential equals the inflation differential, then :

Expected spot rate after n years = current spot rate * ((1 + Japan inflation rate) / (1 + US inflation rate))n

Expected spot rate after 1 year = 100 * ((1 + 11%) / (1 + 6%))1

Expected spot rate after 1 year = 104.717 yen / 1 dollar, or $1 = 104.717 yen.

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