If a major international bank is offering Yen deposits yielding 1% when at the same time dollar deposits are yielding 7%, and the spot exchange rate is $1.00 = Yen 110

(a) 3 marks What can you deduce about market expectations regarding the likely future exchange rate?

(b) 4 marks If you are convinced that the spot exchange rate 12 months from now will be $1.00 = Yen 120, what should you do? Give your answer from the point of view, first, of an American, then of a Japanese trader.

(c) 3 marks In the previous part, what will happen if, in the event, the exchange rate turns out to be $1.00 = Yen 102 at the end of the year?

(d) 3 marks If the forward exchange rate is currently $1.00 = Yen 108, what should a currency trader do?

(e) 2 marks Compare the riskiness of the strategies in b) and d) above.