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5. Covered versus uncovered interest arbitrage On May 31, Manuel, an American investor, decided to buy three-month Treasury bills. He found that the per-annum interest rate on three-month Treasury bills is 7.00% in New York and 9.00% in Tokyo, Japan. Based on this information and assuming that tax costs and other transaction costs are negligible in the two countries, it is in Manuel's best interest to purchase three-month Treasury bills in because it allows him to earn more for the three months. On May 31, the spot rate for the yen was $0.100, and the selling price of the three-month forward yen was $0.099. At that time, Manuel chose to ignore this difference in exchange rates. In three months, however, the spot rate for the yen rose to $0.102 per yen. When Manuel converted the investment proceeds back into U.S. dollars, his actual return on investment was As a result of this transaction, Manuel realizes that there is great uncertainty about how many dollars he will receive when the Treasury bills mature. So, he decides to adjust his investment strategy to eliminate this uncertainty. On May 31, the spot rate for the yen was $0.100, and the selling price of the three-month forward yen was $0.099, At that time, Manuel chose to ignore this difference in exchange rates, In three months, however, the spot rate for the yen rose to 50.102 per yen. When Manuel converted the investment proceeds back into U.S, dollars, his actual return on investment was As a result of this transaction, Manuel realizes that there is great uncertainty about how many dollars he will recerve when the Tieasury bills inature. So, he decides to adjust his investment strategy to eliminate this uncertainty. What should Manuel's strategy be the next time he considers investing in Treasury bills? Contract in the forward market to sell the foreign currency in the amount of the proceeds from the investment. Exchange half of the anticipated proceeds of the investment for foreign currency. Avoid investment in foreign institutions. Had Manuel used the covered interest arbitrage strategy on May 31, his net return on investment (relative to purchasing the U.S. Treasury bills) in Japanese three-month Treasury bills would be (Note: Assume that the cost of obtaining the cover is zero.) 5. Covered versus uncovered interest arbitrage On May 31, Manuel, an American investor, decided to buy three-month Treasury bills. He found that the per-annum interest rate on three-month Treasury bills is 7.00% in New York and 9.00% in Tokyo, Japan. Based on this information and assuming that tax costs and other transaction costs are negligible in the two countries, it is in Manuel's best interest to purchase three-month Treasury bills in because it allows him to earn more for the three months. On May 31, the spot rate for the yen was $0.100, and the selling price of the three-month forward yer At that time, Manuel chose to ignore this difference in exchange rates. In three months, however, the spot rate for the yen rose to On May 31, Manuel, an American investor, decided to buy three-month Treasury bills. He found that the per-annum interest rate on three-month Treasury bills is 7.00% in New York and 9.00% in Tokyo, Japan. Based on this information and assuming that tax costs and other transaction costs are negligible in the two countries, it is in Manuel's best interest to purchase three-month Treasury bills in because it allows him to earn more for the three months. the spot rate for the yen was $0.100, and the selling price of the three-month forward yen was $0.099. At that time, Manuel chose to difference in exchange rates. In three months, however, the spot rate for the yen rose to $0.102 per yen. When Manuel converted the investment proceeds back into U.S. dollars, his actual return on investment was As a result of this transaction, Manuel realizes that there is great uncertainty about how many dollars he will So, he decides to adjust his investment strategy to eliminate this uncertainty. What should Manuel's strategy be the next time he considers investing in Treasury bills? Contract in the forward market to sell the foreign currency in the amount of the proceeds from the Contract in the forward market to se 1.50%gn currency in the amount of the proceeds from the investment. Exchange half of the anticipated pro 1.50% e investment for foreign currency. Avoid investment in foreign institutic Had Manuel used the covered interest arbitrag 0.50% on May 31, his net return on investment (relative to purchasing the U.S. Treasury bills) in Japanese three-month Treasury bills would be (Note: Assume that the cost of obtaining the cover is zero.)