Intro

The annual risk-free interest rate is 3% in the U.S. and 7% in Japan. The spot rate is $0.009 per yen and the one-year forward rate is $0.0086 per yen.

Attempt 1/3 for 5 pts.

Part 1

What is the no-arbitrage forward rate (in $ per yen)?

Correct

Forward premium from interest rate parity:

p=1+rh1+rf1=1+0.031+0.071=0.03738p=1+rh1+rf-1=1+0.031+0.07-1=-0.03738

No-arbitrage forward rate:

F=S(1+p)=0.009(1+(0.03738))=F=S(1+p)=0.009(1+(-0.03738))= 0.00866

Attempt 1/1 for 3 pts.

Part 2

Who can profit from covered interest arbitrage, and how? Ignore taxes and transaction costs.

Check all that apply:

U.S. investors can profit by buying yen in the forward market.

U.S. investors can profit by selling yen in the forward market.

Japanese investors can profit by selling dollars in the forward market.

No one can profit from covered interest arbitrage.

Japanese investors can profit by buying dollars in the forward market.