Question

The three-month
interest rate on yen is i_{¥}=1% per annum; the three-month
interest rate on euros is i_{€}=5.5% per annum. Which one
of the following statements is correct?

Select one:

a. Based on the Uncovered Interest Rate Parity, the euro is expected to appreciate by 4.5% against yen next three months.

b. To start a carry trade, a trader can short the euro against yen in three-month forward contracts.

c. According to the asset market approach, the current spot rate
should be ¥1.293/€ if the expected three-month spot rate
S_{3}(¥/€)=1.250.

d. In a carry trade between euro and yen for three months, the profit will be ¥0.0315(for each yen borrowed) if the euro has appreciated 2% against yen in the three months.

e. The euro is going to appreciate in the next year.

Answer #1

According to the uncovered interest rate parity,when there would be appreciation in the interest rate of one currency against the other currency, it would be neutralized by depreciation in value of the similar currency against the other currency so there would not be any positive impact after factoring in currency rates.

In this case, the euro has a higher interest rate than Yen,so in the future market the euros will be depreciating against the Yen in order to compensate for the increase in the interest rates so one can go short on the Euros in order to make money in futures market.

Correct answer will be option (b) which states that, To start a carry trade, a trader can short the Euro against Yen in 3 month forward contract.

The three-month interest rate on yen is i¥=1% per
annum; the three-month interest rate on euros is i€=5.5%
per annum. Which one of the following statements is correct?
Select one:
a. Based on the Uncovered Interest Rate Parity, the euro is
expected to appreciate by 4.5% against yen next three months.
b. In a carry trade between euro and yen for three months, the
profit will be ¥0.0315(for each yen borrowed) if the euro has
appreciated 2% against yen in...

6)The three-month interest rate on yen is i¥=1% per annum; the
three-month interest rate on euros is i€=5.5% per annum. Which one
of the following statements is correct?
Select one:
a. In a carry trade between euro and yen for three months, the
profit will be ¥0.0315(for each yen borrowed) if the euro has
appreciated 2% against yen in the three months.
b. Based on the Uncovered Interest Rate Parity, the euro is
expected to appreciate by 4.5% against yen...

3) Suppose that the spot exchange rate S(¥/€) between the yen
and the euro is currently
¥110/€, the 1-year euro interest rate is 6% p.a., and the 1-year
yen interest rate is 3% p.a.
Which of the following statements is MOST likely to be true?
A. The high interest rate currency must sell at a forward premium
when priced in the low
interest rate currency to prevent covered interest arbitrage
Page 3 of 13
B. Real interest parity does not...

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6 percent per annum in the euro zone, respectively. The spot
exchange rate is $1.25 = €1.00, and the one-year forward exchange
rate is $1.20 = €1.00. As informed traders recognize the deviation
from IRP and start carrying out covered interest arbitrage
transactions to earn a certain profit, how will IRP be restored as
a result?
A. Interest rate in the euro zone will rise; interest rate in...

According to uncovered interest rate parity, if the interest
rate in Japan decreases, all else equal, ________.
Select one:
a. Japanese yen is expected to depreciate against U.S dollar
b. U.S. dollar is expected to depreciate against Japanese
yen
c. the exchange rate of Japanese yen against U.S. dollar remains
unchanged
d. U.S. dollar is expected to appreciate against Japanese
yen
If U.S. residents increased their imports of cheese from
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interest rate is 5% per year, The current spot rate is $0.5/SF and
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is expected to appreciate by 1% in the next 90 days so the annual
rate of expected increase is 4%. Assume uncovered interest parity
holds at these rates. Describe what happens to the spot rate if US
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a) (5 pts). What is the implied three-month US$ interest
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Spot price for the Euro is $1.174 per Euro.
Three-month forward price is $1.06 per Euro.
U.S. dollar LIBOR for three months is a continously compounded
rate of 1.26% per annum.
Euro LIBOR for three months is a continuously compounded rate
of 3.98% per annum.
Underlying asset for this contract (i.e., the quantity of Euros
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