Suppose that you are the treasurer of Volkswagen with an extra 1,000,000 to invest for three months. You are considering the purchase of German T-bills that yield 0.610% (that's a three month rate, not an annual rate by the way) and have a maturity of 13 weeks. The spot exchange rate is 1.00 = 120, and the three month forward rate is 1.00 = 130. The interest rate in Japan (on an investment of comparable risk) is 6 % for three months. What is your strategy?

Select one:

a. take 1million, translate into yen at the spot, invest in Japan, repatriate your yen earnings back into euros at the spot rate prevailing in three months.

b. take 1 million, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract

c. take 1 million, invest in German T-bills

d. take 1million, translate into yen at the spot rate, invest in Japan, hedge with a long position in the forward contract