Question
Suppose Japanese yen money market annual rate is .60% and U.S. money market has an annual rate of 4.50%. 1). The predictions on the spot
Suppose Japanese yen money market annual rate is .60% and U.S. money market has an annual rate of 4.50%.
1). The predictions on the spot rate in 6 months made by financial analysts X and Y are 116/$ and 114/$ respectively. If the spot rate today is 115/$, which prediction do you think is more reasonable, why?
2). What should be the spot rate in 6 months based on parity condition?
3). If the forward rate in 6 months is 113/$, will there be arbitrage opportunity, why? If yes then which investment strategy will offer you profit (hint: borrow or lend, dollar or yen, buy or sell forward)?
4). Suppose you adapt the correct arbitrage strategy with the starting investment value of $43,478.2609 or 5,000,000, what will be the net proceeds? Please show each step clearly.
5). If financial analyst X believes his prediction is right, then what he would do to explore the market profit opportunity?
6) What is the key difference between the strategy adopted by analyst X in part 5 and the strategy in part 4?
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