Your firm (a U.S. firm) needs some cash to fund operations for the next 12 months-about $100 million. For the past few years, you have noticed that the competitors have been borrowing money in Japan and your boss keeps mentioning the near-zero short-term government rates in Japan. While there are a lot of psychological barriers and it just seems like it will be a major pain in the neck, you finally decide to think about borrowing in yen. You call your bankers for a quick indication of the 1-year rates you would likely face in each currency--the interest rate is indeed much lower in yen than in dollar, as shown below. Your firm does have operations in Japan, which might facilitate taking out a yen loan. You actually need dollars for operations so you will convert the loan proceeds at the spot rate and you will be paying the loan back at the end of the year with dollar funds converted to yen. The current spot and 1-year forward rates are shown below. Ignore irrelevant information.

1-year interest rates: Yen = 0.01375  Dollar0.04

Exchange rates: Spot 120.5¥/$1-year forward:117.459¥/$

1. How many dollars (in millions) will you need to repay the yen loan if you cover it (i.e. fix the dollars required for yen repayment) with a forward contract? 

2. If you believe that the yen will depreciate against the dollar, should you cover the yen loan? Yes or no, why? 

3. If the actual ¥/$ spot rate turns out to be 125¥/$ in one year, does that disprove the unbiased expectation hypothesis (i.e forward parity) Yes or no, why?