One of your colleagues at Deutsche Bank thinks that the dollar is severely undervalued relative to the yen He has calculated that the PPP exchange rate is 140 $, whereas the current exchange rate is 105 $ Because interest rates are 3 p a lower in Japan than in the United States, he thinks that this...

Deviations from PPP are a weak reason to engage in speculation While the data in the problem indicat ...

One of your colleagues at Deutsche Bank thinks that the dollar is severely undervalued relative to the

Question:

One of your colleagues at Deutsche Bank thinks that the dollar is severely undervalued relative to the yen. He has calculated that the PPP is ¥140/$, whereas the current is ¥105/$. Because interest rates are 3% p.a. lower in Japan than in the United States, he thinks that this is a good time to speculate by borrowing yen and lending dollars. What do you think?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...