a) Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot
Question:
a) Derek Tosh is attempting to determine whether US/Japanese financial conditions are at parity. The current spot rate is a flat ¥89.00/$, while the 360-day forward rate is ¥84.90/$. Forecast inflation is 1.100% for Japan, and 5.900% for the US. The 360-day interest rate for Japan is 4.700%, and the 360-day interest rate for the United States is 9.500%. (Japan as home country and US as foreign country)
i) Calculate whether international parity conditions hold between Japan and the United States
ii) According to the international Fisher effect, what is the expected sport rate of the United State in one year?
iii) Derek Tosh a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. (6 marks)
Multinational Business Finance
ISBN: 978-0133879872
14th edition
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett