A portfolio manager at a European based bank is trying to decide how to invest: 10,000 EUR, and he must choose between 1-year euro deposits and 1-year yen investments. In the latter case, he knows that he must worry about transaction foreign exchange risk, but he also understands that he can use the appropriate forward contract to eliminate it.

Suppose the manager has the following data:

EUR interest rate: 3.5200% per annum

JPY interest rate: 0.5938% per annum

Spot exchange rate: EUR/JPY = 146.03 (1 EUR = 146.03 JPY)

1-year forward exchange rate: EUR/ JPY = 141.2

1. Write a formula for future price at 9 Months.

2. Find the future price in 9 Months and the spot price at equilibrium.