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2. Synthetic Forward a) Explain how deposits and spot transactions in the foreign exchange rate can be used to create the same payoff as a

2. Synthetic Forward

a) Explain how deposits and spot transactions in the foreign exchange rate can be used to create the same payoff as a forward contract. Illustrate with an example.

b) Assume the US interest rate on a 1 year deposit is 1% and the Japanese rate on an identical deposit is % and the spot rate is 100 yen/US$. Compute the forward rate and the forward premium. Show calculations.

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