The interest rate on South Korean government securities with one-year

maturity is 4 percent, and the expected inflation rate for the coming year

is 2 percent. The interest rate on U.S. government securities with oneyear maturity is 7 percent, and the expected rate of inflation is 5 percent.

The current spot exchange rate for Korean won is $1 = W1,200.

Forecast the spot exchange rate one year from today. Explain the logic

of your answer.