1. Assume that the spot exchange rate between dollars and yen is e = $1/Y90. The interest on 180-day dollar-denominated assets is i^$= 1%, and the interest rate on comparable 180-day yen-denominated assets is also i^Y = 1%. The 180-day forward exchange rate between dollars and yen is e_f = $1/Y100.

1. Assume that you are highly risk-averse. What kind of adjustments, if any, might you make in your asset portfolio? Explain.

2. Now assume you do not mind bearing exchange rate risk. You think that the spot exchange rate between dollars and yen in 180 days will be $1/Y90. What kind of adjustments, if any, would you make in your asset portfolio? Explain.