You observe the following current rates: Spot exchange rate: $0.01/yen. Annual interest rate on 90-day U.S. dollar-denominated bonds: 4%. Annual interest rate on 90-day yen-denominated bonds: 4%.
a. If uncovered interest parity holds, what spot exchange rate do investors expect to exist in 90 days?
b. A close U.S. presidential election has just been decided. The candidate whom international investors view as the stronger and more probusiness person won. Because of this, investors expect the exchange rate to be $0.0095/yen in 90 days. What will happen in the foreign exchange market?