If a major international bank is offering Yen deposits yielding 1% p.a. when at the same time

Question:

If a major international bank is offering Yen deposits yielding 1% p.a. when at the same time dollar deposits are yielding 7% p.a., and the spot exchange rate is $1.00 = Yen 110

(a) what can you deduce about market expectations regarding the likely future exchange rate?

(b) If you are convinced that the spot exchange rate 12 months from now will be $1.00 = Yen 120, what should you do? Give your answer from the point of view, first, of an American, then of a Japanese trader.

(c) In the previous part, what will happen if, in the event, the exchange rate turns out to be $1.00 = Yen 102 at the end of the year?

(d) If the forward exchange rate is currently $1.00 = Yen 108, what should a currency trader do?

(e) Compare the riskiness of the strategies in b) and d) above.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...

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