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Attempts

Keep the Highest $/2$

The forward rate

Suppose the selling price of the three$-$month forward Japanese yen is $$0\mathrm{.}010506$ per yen, and the spot price is $$0\mathrm{.}010495$ per yen. Complete the

following formula for the per annum percentage premium $($or discount$)$ to calculate what the yen is worth in the three$-$month forward market.

Therefore, thetiapanese yen is at a

against the U$.$S$.$ dollar, because it is worth

in the three$-$month forward market than in the

spot market.

Attempts

Keep the Highest $/4$

Covered versus uncovered interest arbitrage

On May $31,$ Eric, an American investor, decided to buy three$-$month Treasury bills. He found that the per$-$annum interest rate on three$-$month Treasury

bills is $7\mathrm{.}00\%$ in New York and $9\mathrm{.}00\%$ in Tokyo, Japan. Based on this information and assuming that tax costs and other transaction costs are

negligible in the two countries, it is in Eric's best interest to purchase three$-$month Treasury bills in

$,$ because it allows him to

earn

more for the three months.

On May $31,$ the spot rate for the yen was $$0\mathrm{.}100,$ and the selling price of the three$-$month forward yen was $$0\mathrm{.}099.$ At that time, Eric chose to ignore

this difference in exchange rates. In three months, however, the spot rate for the yen rose to $$0\mathrm{.}102$ per yen.

When Eric converted the investment proceeds back into U$.$S$.$ dollars, his actual return on investment was

As a result of this transaction, Eric realizes that there is great uncertainty about how many dollars he will receive when the Treasury bills mature. So$,$

he decides to adjust his investment strategy to eliminate this uncertainty.

What should Eric's strategy be the next time he considers investing in Treasury bills?

Exchange half of the anticipated proceeds of the investment for foreign currency.

Sell enough foreign currency on the forward market to match the anticipated proceeds from the investment.

Exchange half of the anticipated proceeds of the investment for domestic currency.

Had Eric used the covered interest arbitrage strategy on May $31,$ his net return on investment $($relative to purchasing the U$.$S$.$ Treasury bills$)$ in

Japanese three$-$month Treasury bills would be

$.($Note: Assume that the cost of obtaining the cover is zero.$)$