Dollar Return on Foreign Investments -

(A) You can borrow or invest in the U.S. at an annual rate of 6 percent. Suppose you logon to your favorite financial website and see that you could borrow or invest in Japan at a 5 percent annual rate. The current exchange rate between the dollar and the yen is $0.01/yen. You can use the futures market to lock it in at an exchange rate for one year from now at $0.0095/yen. Is there a profit opportunity here? Prove it by borrowing (either $1 million or $100 yen) in one country and investing in the other? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Inflation and Exchange Rates -

(B) Suppose gold sells for $1,000 per ounce in the U.S. and it sells for 1,000 Canadian dollars per ounce in Canada. Suppose further, the exchange rate is $1 per Canadian dollar. If U.S. inflation is 6 percent next year, Canadian inflation is 2 percent, and exchange rates do not change, how could you make an arbitrage profit in the gold market? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(C) Suppose U.S. interest rates on a risk-free, one-year bond are 4 percent and European interest rates on a risk-free, one-year bond are 6 percent. Suppose further than inflation is 2 percent in the U.S. and 4 percent in Europe. Assume it takes one year for the exchange rate to adjust to inflation differences. What is the predicted change in the $/euro exchange rate for the next year? Given that, what would the dollar return on a European bond be for this year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).