$($a$)$ Refer to the USD$/$JPY spot and forward bid$-$ask rates at the above table and

assuming USD is your home currency, answer the following questions:Question $2$

$\backslash$table$[[$Period$,\backslash$table$[[$USD$/$JPY$],[$Bid Rate$]],\backslash$table$[[$USD$/$JPY$],[$Ask Rate$]]],[$spot$,85\mathrm{.}41,85\mathrm{.}46],[1$ month,$85\mathrm{.}02,85\mathrm{.}05],[2$ months,$84\mathrm{.}86,84\mathrm{.}90],[3$ months,$84\mathrm{.}37,84\mathrm{.}42],[6$ months,$83\mathrm{.}17,83\mathrm{.}20],[12$ months,$82\mathrm{.}87,82\mathrm{.}91],[24$ months,$81\mathrm{.}79,81\mathrm{.}82]]$

$($a$)$ Refer to the USD$/$JPY spot and forward bid$-$ask rates at the above table and assuming USD is your home currency, answer the following questions:

$\frac{2}{4}$

CQC$7016$

i$.$ Compute the mid$-$rate for each maturity.

$(7$ marks$)$

ii$.$ Calculate the annual forward premium for all maturities based on the computed mid$-$rates as per $($i$).$

$(6$ marks$)$

iii. Identify the maturities with the smallest and largest forward premiums.

$(2$ marks$)$

$($b$)$ The term carry trade is used quite frequently in the business press. What does it mean, and what conditions and expectations do investors need to hold to undertake carry trade transactions?

$(5$ marks$)$

$($c$)$ Define the law of one price. According to the theory of purchasing power parity, what should happen to a currency which is undervalued?

$(5$ marks$)$