Question
Given the financial investment alternatives (U.S. vs. Japan investment) and related financial information, answer/calculate the following: r = 2% (home (U.S.) annual interest rate); r*
Given the financial investment alternatives (U.S. vs. Japan investment) and related financial information, answer/calculate the following: r = 2% (home (U.S.) annual interest rate); r* = 4% (foreign (Japan) annual interest rate); 1-year forward rate = 113.67 per $, or $0.0088 per ; expected 1-year spot rate = 110.52 per $, or $0.0090 per . a. Other things being equal, assume that Smith has $8,000. If the current spot rate is 109.92 per $ or $0.0091 per and the hedging strategy is used, which market (U.S. or Japan) will you recommend Smith to invest? Why? (3 points) b. Supposed the current spot exchange rate (et) is unknown, use the above data and formulate the covered interest parity (per $) condition to calculate (et). (2 points) c. Supposed the current spot exchange rate (et) is unknown, use the above data and formulate the uncovered interest parity condition (per $) to calculate (et). (2 points) d. Based on the provided data, now supposed (et) = 106.55 per $, calculate the risk premium (p). (2 points)
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