PROBLEM #1

Assume you have $1,000,000 that you can invest for the next 180 days. Using only the data given below, answer the following questions. (a and b).

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Spot rate: Yen 200 per U.S. Dollar

180 day forward rate: Yen 210 per U.S. Dollar

Your forecast of the spot rate

In 180 days: Yen 190 per U.S. dollar

U.S. interest rate (annual): 10%

Japanese interest rate (annual): 10%

a.) 10 Points

In which country would you invest your $1,000,000 if you decided to use the forward market? What total amount (in dollars) would you obtain at the end of 180 days? Show the necessary calculations.

b.) 10 Points

In which country would you invest your $1,000,000 if you are 100% certain that your forecast will come true? What total amount (in dollars) would you obtain at the end of 180 days.