Microsoft Word – TKQ3.docxMicrosoft Word – TKQ3.docxQuestion 1: Consider two countries: Japan and France. Suppose you saw the following information in thenewspaper:Interest rate on one-year Japanese...

Microsoft Word – TKQ3.docxMicrosoft Word – TKQ3.docxQuestion 1: Consider two countries: Japan and France. Suppose you saw the following information in thenewspaper:Interest rate on one-year Japanese deposits = 8% Interest rate on one-year French deposits = 6% Current spot rate: 100 yens per euroFurther suppose that based on your research on the two countries, you expect the spot rate is going to be 105 yens per euro a year from now. Round numbers to 3 decimal points.(5pts) Does uncovered interest parity (in exact form) hold?(5 pts) If not, at what current spot rate would the uncovered interest parity hold?(10 pts) How might the current spot rate be driven to this level? Explain.Question 2: Consider an American investor seeking to invest in France. Using the UIP condition, explain how each of the following would affect the value of the euro and U. S. dollar.(10 pts) A decrease in U. S. interest rates.(10 pts) An increase in France’s interest rates.(10 pts) A decrease in the expected future exchange rate, Ee$/€