Question 3: Foreign Exchange Market Suppose on 1 January 2022 interest rate in US (home country) was 0.25% and in Japan was -0.1%, whereas the spot exchange rate was 115 ¥/$. On 15 June 2022, US increased interest rate to 1.75% while Japan interest rate remained the same, the Japanese exchange rate depreciated from 115 ¥/S to 137 ¥/$. (*Using proper diagram(s) and interest rate parity condition) A) Explain why exchange rate changed from 115€ per dollar to 137¥ per dollar. B) With US inflation reached new 40-year high in June 2022 of 9.1%, it is expected that US will keep increasing her interest rate toward the end of this year. a) How the expectation will affect the current spot exchange rate?

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Currency Market

The currency market, also known as the foreign exchange market, consists of currencies worldwide. This market determines the rate of all currencies based on the buying and selling of forex. It is an over-the-counter market. It is the largest and most liquid market based on trade volume.