Problem
1. If US short-term interest rates are 12 percent and Japanese rates are 9 percent and the Japanese yen is trading at a 3 percent (annual rate) discount in the forward market, what does that imply about the market's expectations with regard to US and Japanese inflation? Why?
2. In September of 1998 the following deposit interest rates were offered in Jakarta, Indonesia: US dollar deposits: 1 month 15 percent, 6 months 14 percent, 1 year 12 percent. Rupiah deposits: 1 month 50 percent, 6 months 30 percent, 1 year 20 percent. What discount or premium should exist on the rupiah in the forward markets at the three maturities? What other inferences can you make from these interest rates? If you later discovered that the US dollar deposits in the United States yielded 6 percent at all maturities, and that the central bank of Indonesia provided deposit insurance on rupiah deposits but not on dollar deposits, how would your conclusions change?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.