You are given the following information by Apple PLC
Spot Exchange Rate ($
/ ¥) $1.00 / ¥100.00
USA Interest Rate 7.5%
Japan Interest Rate 2%
USA Inflation Rate 4%
Japan Inflation Rate 1%
a) Using the interest rate parity theory, determine:
i. Whether the $ will appreciate or depreciate
ii. The new $ / ¥ exchange rate after depreciation or appreciation
b) Briefly explain whether at equilibrium, investing in Japan will generate more profit for a US
investor than investing in the US.
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