Question

nswer questions 1 through 10 based on the following data:

•

3-month US (domestic) interest rate = 1.50%

•

3-month Japanese interest rate = 1.00%

•

Current spot exchange rate = $0.090 per yen

•

Current forward exchange rate = $0.095 per yen

1. The 3-month yen-denominated gross return on Japanese yen deposits is ______ or so.

A) 1.01

B) 0.01

C) 1.0661

D) 0.0661

2. The 3-month yen-denominated return of return on Japanese yen deposits is ______ or so.

A) 101%

B) 1%

C) 106.61%

D) 6.61%

3. On a covered basis, the 3-month dollar-denominated gross return on Japanese yen deposits is

______ or so based on the exact formula.

A) 0.9568

B) 1.000

C) 1.0572

D) 1.0661

4. On a covered basis, the 3-month dollar-denominated rate of return on Japanese yen deposits is

______ or so based on the exact formula.

A) -4.32%

B) -1.00%

C) 6.61%

D) 8.52%

Answer 1

Here, the current forward exchange rate = 0.095 per yen.

The spot exchange rate = 0.090 per yen.

The three month US(domestic) interest rate = 1.50%.

The three month JapaneeJ interest rate = 1.00%.

1. The three month yen denominated gross return on Japanese yen deposit is 1.01%. The Japanese interest rate is 1%. Therefore, per yen one will be receiving .01 interest rate. So, the return would be 1.01%.

2.:The three month yen denominated return on Japanese yen deposits is 1%. This is because the Japanese interest rates for 3 months is 1%.

3. On a covered basis the three month dollar denominated gross return on Japanese yen deposits is 1.000. This is because the Japanese interest rate is 1%.

4. On a covered basis the three month dollar denominated rate if return on Japanese yen deposits is -1.00%.