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Suppose the interest rate in Japan is 1.0% p. a. and the interest rate in the US is 2.0% p. a. Assume both borrowing and

Suppose the interest rate in Japan is 1.0% p. a. and the interest rate in the US is 2.0% p. a. Assume both borrowing and investing can occur at these rates. The spot rate is 100 per dollar. Assume that an investor borrows $100 and converts it to yen and invests for a year in a yen denominated bond. What is the one year ahead forward rate that will make covered interest arbitrage not profitable? [Please note that the exchange rates are stated in indirect terms.]

Approximately 98 yen per dollar

Approximately 99 yen per dollar

Approximately 101 yen per dollar

Approximately 102 yen per dollar

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