Today is Jan $1,2024,$ and the annual $($nominal$)$ interest rates in JPY and EUR are respectively, $1\%$ and $5\%.$ The JPY$/$EUR spot exchange rate today is JPY$/$EUR $120.$

You work currencies on the trading desk at Nomura and you're considering investing in the JPY$-$EUR carry trade. Your borrowing limit is JPY $1$ Billion.

Question $1$: If the inflation rates in Japan and the EU for $2024$ are expected to be $2\%$ and $3\%,$ respectively, how much profit would you expect to make from the JPY$-$EUR carry trade between Jan $1$ and Dec $31,2024?$

Answer:

Choose one of the following answers:

$A=$ JPY $71\mathrm{.}29$ Million

B $=$ JPY $49\mathrm{.}87$ Million

C $=$ JPY $29\mathrm{.}39$ Million

$D=JPY8\mathrm{.}61$ Million

Question $2$: Suppose that you decided to use all your capital to enter in the JPY$-$EUR carry trade today $($Jan $1,2024).$ If the EUR were to appreciate by $10\%$ against the JPY on Dec $31,2024,$ how much profit would you make from your carry trade between Jan $1$ and Dec $31,2024?$

Answer:

Choose one of the following answers:

A $=$ JPY $169\mathrm{.}44$ Million

$B=JPY144\mathrm{.}54$ Million

C $=$ JPY $121\mathrm{.}98$ Million

$=$ JPY $105\mathrm{.}57$ Million