An investor invests in a Japanese bond at 6% for one year. The equivalent USA investment yields 7%. If the spot exchange rate is 104.00 yen per USD, what is the expected forward exchange rate in yen per USD? Multiple Choice 103.61 103.49 103.03 102.31 None of the options are correct.
Added by Andrew C.
Step 1
To find the expected forward exchange rate in yen per USD, we can use the interest rate parity formula, which states that the forward exchange rate can be calculated based on the spot exchange rate and the interest rates of the two currencies involved. Show more…
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An investor invests in a Japanese bond at 7.0% for one year. If the spot exchange rate is 104.00 yen per USD and the one year forward exchange rate is 99, what return should the investor expect on an equivalent USD investment? Multiple Choice 9.60% 10.20% 11.92% 12.40%
Akash M.
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Nick J.
The current forward exchange rate = 0.095 per yen. The spot exchange rate = 0.090 per yen. The three-month US (domestic) interest rate = 1.50%. The three-month Japanese interest rate = 1.00%. (Answers from previous questions) 1. The three-month yen-denominated gross return on Japanese yen deposit is 1.01%. The Japanese interest rate is 1%. Therefore, per yen one will be receiving 0.01 interest rate. So, the return would be 1.01%. 2. The three-month yen-denominated return on Japanese yen deposits is 1%. This is because the Japanese interest rates for 3 months is 1%. 3. On a covered basis, the three-month dollar-denominated gross return on Japanese yen deposits is 1.000. This is because the Japanese interest rate is 1%. 4. On a covered basis, the three-month dollar-denominated rate of return on Japanese yen deposits is -1.00%. 5. On a covered basis, the 3-month dollar-denominated rate of return on Japanese yen deposits is ______ or so based on the approximation formula. A) -5.12% B) 6.56% C) 6.92% D) 7.15% 6. The Japanese yen trades at a forward ______ of ______ against the dollar. A) premium; 1.00% B) premium; 5.56% C) discount; 2.52% D) discount; 6.82% 7. The US dollar trades at a forward ______ of ______ against the yen. A) premium; 2.50% B) premium; 5.56% C) discount; 5.26% D) discount; 3.95% 8. As the data indicates, the forward market predicts that ___________ within three months. A) the yen will appreciate about 2.5% against the US dollar B) the yen will appreciate about 3.75% against the US dollar C) the yen will depreciate about 5.56% against the US dollar D) none of the above 9. If you engage in a covered interest arbitrage by investing the principal of $1,000,000 in Japanese yen deposits, then the initial dollar fund will grow to ______ or so within three months. A) $1,055,258 B) $1,066,111 C) $1,070,151 D) No, the end-of-period fund must be less than the initial fund 10. All else equal, a risk-averse investor should invest in ___________ on a covered basis. A) dollar-denominated assets B) yen-denominated assets C) dollar- and yen-denominated assets equally D) data is insufficient to determine the investment direction.
Aarya B.
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