Question 5 (This question has three parts (a),(b) and (c))

(a) After observing that the interest rate on the Japanese Yen is much higher than the interest rate on the US dollar, a Japanese investor decides to borrow USD, converts to JPY to invest in a Japanese term deposit. On 1st April 2021, the investor borrows 10 million USD for 1 year at the rate of 0.5% p.a. to invest in the Japanese term deposit which pays 3% p.a. The USD/JPY exchange rate on 1st April 2021 is 112.97-03. With 1 million USD, how much Japanese Yen the investor is able to get?

(b) Suppose that the investor puts the amount of JPY in a Japanese saving account and earns an interest of 3% p.a. After 1 year, the investor needs to convert JPY back to USD to repay the loan in USD. How much JPY does the investor have after 1 year?

(c) How much does the investor need to pay the U.S. bank in USD? Suppose that the investor decides to convert all the amount of JPY he has to USD on 1st April 2022, the JPY/USD exchange rate is 108.55-62, how much USD does he have after conversion? After repaying the US bank, did the investor make a gain or loss on his investment? How much was the gain or loss?