please answer c) on the last line

Assessing Whether IRP Exists. Assume zero transactions costs. As of now, the Japanese one-year interest rate is 3 percent, and the U.S. one-year interest rate is 9 percent. The spot rate of the Japanese yen is $.0090 and the one-year forward rate of the Japanese yen is $.0097.

a. Determine whether interest rate parity exists, or whether the quoted forward rate is quoted too high or too low.

b. Based on the information provided in (a), is covered interest arbitrage feasible for U.S. investors, for Japanese investors, for both types of investors, or for neither type of investor?

ANSWER:

a. (1 + .09)/(1 + .03) -1 = ..05825 if IRP exists.

If IRP exists, the forward rate should be [1 + (.05825)] x $.009 = $.00952

The quoted forward rate is too high. IRP does not exist.

b. U.S. investors could engage in covered interest arbitrage by exchanging dollars for yen today and then selling yen forward.

c) what would happen if the forward rate 0.98 instead of 0.952?