1. (2.5 Points) You are given the following information:

	U.S.	France	Japan
Nominal one year interest rate	5%	6%	7%
Spot rate	-----	$1.16	$0.008

Interest rate parity exists between the U.S. and France as well as the U.S. and Japan. The international Fisher effect exists between the U.S. and France as well as the U.S. and Japan.

Bill (based in the U.S.) invests in a one-year CD (certificate of deposit) in France and sells euros one year forward to cover his position.

Erica (based in France) invests in a one-year CD in Japan and does not cover her position.

What are the returns on funds invested for Bill and Erica respectively? Please justify your explanation both in terms of theory and calculations. (2.5 points) (Hint: You can get the exchange rate between euro and Japanese Yen from their respective rate to USD)

ANS: Please clearly label your return calculations, i.e., the investment return for Bill and Erica respectively.

2. (2.5 Points) The U.S. three-month interest rate (unannualized) is 1%. The Canadian three-month interest rate (unannualized) is 4%. A put option with a three-month expiration date on Canadian dollars is available for a premium of $0.02 and a strike price of $0.62. The spot rate of the Canadian dollar is $0.65. Assume that you believe in International Fisher Effect (IFE).

Forecast the dollar amount of your profit or loss from buying a put option contract specifying C$100,000. (1.25 points)

Forecasr the USD received by A&M company which uses the put option to hedge against its 3 month receivables of C$ 100,000. (1.25 points)

ANS: Please label a/b in your response to the two sub-questions respectively.