Can you show me how to work this economic question out?

The interest rate on So. Korean govt. securities with 1 year maturity in 4%, and the expected inflation rate for the coming yr is 2%. The interest rate on U.S. govt. securities with 1 year maturity is 7%, and the expected rate of inflation is 5%. The current spot exchange rate for Korean won is $1 = W1,200. What is the forecast spot exchange rate one year from today?Can you show me how to work this economic question out?
There are two concepts involved:





(1) the weak form of the Purchasing Power Parity (PPP), which says that the % change of the exchange rate is equal to the difference between the current domestic and foreign inflation rate: delta(S) = p(d) - p(f). Where delta(S): percentage change of the current spot exchange rate S, p(d): domestic inflation rate, p(f): foreign inflation rate.





(2) The Uncovered Interest Parity (UIP), which says that the expected spot exchange rate in period t+1 is equal to the current exchange rate multiplied by the interest rate differential: E[S(t+1)] = S(t)*(1+r(d))/(1+r(f)); where E[S(t+1)]: expected spot exchange rate in one year from now, S(t): current spot exchange rate, r(d): domestic interest rate, r(f): foreign interest rate.





Applying these two concepts you can calculate the expected exchange rate in one year from now.





Both PPP and UIP represent a link between the domestic and the foreign economies. They both are determinants of the exchange rate. The exchange rate determination by the PPP is based upon the concept of goods arbitrage and has nothing to say about the role of capital movements. Capital flows as determinants of the exchange rate are entering through the UIP which states that the expected returns on domestic and foreign bonds are the same, measured in a common currency, thereby assuming that both domestic and foreign bonds have the same degree of riskiness. In the long-run stationary state equilibrium the exchange rate is assumed not to change. Therefore the current exchange rate and the expected future exchange rate will be equal (assuming static expectations):


E[S(t+1)] = S(t)Can you show me how to work this economic question out?
The same.