Assume the following interest rate and exchange rate quotes. You can borrow $1,000,000 or its yen equivalent 100,000,000: Home currency: $ Foreign currency: Spot exchange rate: 100/$ 1-year forward rate: 98/$ 1-year $ interest rate: 1.50% 1-year interest rate: 0.50%

Given the information provided, does the interest rate parity condition hold or not? (2 points) Yes, the interest rate parity condition holds. No, forward premium is greater than interest rate differential. No, forward premium is less than interest rate differential. No, forward premium is equal to interest rate differential. What one of the following is NOT a part of the covered interest arbitrage strategy to make profit? (2 points) Borrow dollar today Buy one-year yen forward Purchase yen in the spot market Invest in yen in the money market What is your profit from the covered interest arbitrage? (2 points) It is a gain of $10,510. It is a gain of $25,510. It is a gain of 1,030,000. It is a loss of 530,000. Which of the following statements is NOT true about carry trade? (2 points) You should borrow low interested yen and invest in high interest dollar. Carry trade is not risk free. You use forward contracts in carry trade. The profit of carry trade depends on the future spot rate. If yen actually depreciates in one year, how will it affect your arbitrage profit? (2 points) It will increase the profit of the covered interest arbitrage. It will decrease the profit of the covered interest arbitrage. It will increase the profit of the carry trade. It will decrease the profit of the carry trade.