Abstract
The document studies the exchange rate in the countries of Japan and Brazil based on the interest rates of a set date.
Extract
[...] Assessment of International Finance - Japan and Brazil - Countries' data to analyze: Japan and Brazil - Date of Birth: 24 January QUESTION Three months from your birthday was the exchange rate higher or lower than you would have expected, given the interest rates in the two countries on your birthday? Carefully explain your answer. On 24 January 2018, interest rate in Japan amounted at 0,05727, while interest rate in Brazil amounted at 10,926 (source: Thomson Reuters). To be noted that on 24 January 2018, exchange rates in both countries Japan and Brazil were as follows: - Japanese Yen to Euro: 121,8595 - Brazilian Real to Euro: 3,4055 Three months from 24 January 2018, exchange rates in both countries Japan and Brazil were as follows: - Japanese Yen to Euro: 119,3788 (-2,4807) - Brazilian Real to Euro: 3,398 (-0,0075) The issue at stake here is to identify the influence of the interest rate in the two countries on the behavior of Japanese and Brazilian exchange rates three months later.1 The objective of the following developments is to quantify the interest- exchange rate relationship. [...]
[...] Let's compare the situation in 2018 of Japan and Brazil. Assume that inflation is expected to be very high in Brazil in 2018. As a result, the people in Brazil will prefer to spend money, and if needed borrow that money, now rather than save.2 Expected inflation in Japan early 2018 is 0.98% while inflation is Brazil amounts to 3.66%. Source: https://fr.inflation.eu/taux-de-inflation/japon/inflation-historique/ipc-inflation-japon-2018.aspx Source: https://fr.inflation.eu/taux-de-inflation/bresil/inflation-historique/ipc-inflation-bresil-2018.aspx Since the expected inflation is 2.68 percent higher in Brazil than Japan, the Brazilian Real is expected to decline against the Japanese Yen by about 2,68 percent in the year, thus 0.67% quarterly (Q1 2018). [...]
