In the spot market, 1 U.S. dollar can be exchanged for 114 Japanese yen. In the 1-year forward market, 1 U.S. dollar can be exchanged for 119 Japanese yen. The 1-year, risk-free rate of interest is 5.2 percent in the United States. If interest rate parity holds, what is the yield today on 1-year, risk-free Japanese securities?

a. 1.83%

b. 4.71%

c. 5.37%

d. 8.68%

e. 9.81%

15. If the current 1-year risk free rate in US is 5%, the current 1-year risk free rate in U.K. is 8%, and the current spot rate between USD and GBP is S = USD1.50/GBP, and a one-year forward rate is F = USD1.48/GBP. If interest rate parity holds, what should be the appropriate one year forward rate? What would be your covered interest arbitrage profits if you can borrow $1,000,000 in US at risk free rate?

a. F = USD1.4583/ GBP; arbitrage profits = $15,600

b. F = USD 1.4583/ GBP; arbitrage profits = $17,800

c. F = USD 1.4980/ GBP; arbitrage profits = $15,600

d. F = USD 1.4980/ GBP; arbitrage profits = $17,800