Question $1$

$0\mathrm{.}8$ pts

Q$1$ to Q$3$

In this series of questions $($Q$1$ to Q$3),$ we assume $($to simplify$)$ that there are no bid$-$ask spreads in the markets for exchange rates and for interest$-$rates.

Fiona is a trader at a hedge fund.

The spot exchange rate today for the number of YEN per GBP is $189\mathrm{.}00($YEN is Japanese Yen, GBP is British pounds$).$

The $($annualized$)$ Japanese interest$-$rate applicable for one year from today is $4\mathrm{.}00\%$ per annum.

The $($annualized$)$ British interest$-$rate applicable for one year from today is $5\mathrm{.}00\%$ per annum.

Q$1.$ Preliminary question:

Suppose that the International Fisher Effect holds, then what is the expected $($or predicted$)$ spot rate one year from today.

Give the answer correct to $2$ decimal places. Don't worry if Canvas appears to not accept trailing zeros $--$ it does internally.Question $2$

$0\mathrm{.}8$ pts

Q$2$ follows on from Q$1.$

Q$2$:

Today, Fiona forms the view that the spot rate in one year from now will $($in her opinion or best guess or based on her hunch$)$ be $200\mathrm{.}00($expressed as number of YEN per GBP$).$

In order to act on her hunch, Fiona needs to devise a trading strategy for her to make money if her hunch turns out to be correct.

She is authorized to borrow $792$ mio JPY $($as risk capital $--$ she has to repay this loan with interest$)$ in order to speculate in the market based on her hunch.

Assume Fiona has devised a correct and appropriate trading strategy to act on her hunch.

$($NB: For the sake of being definite, you are NOT to assume that the International Fisher Effect holds in Q$2$ and Q$3.)$

Q$2$: Suppose the spot rate one year from now indeed turns out to be $($as Fiona guessed$)200\mathrm{.}00$ YEN per GBP$.$ How many JPY does Fiona's company make in profit $($if the amount is a loss, enter with a minus sign$)?$

Give your answer in JPY to the nearest JPY$.$Question $3$

$0\mathrm{.}8$ pts

This follows on from Q$1$ and uses the same market data.

Q$3$: As an alternative to Q$2$:

Suppose the spot rate one year from now turns out to be $187\mathrm{.}20.$ How many JPY does Fiona's company make in profit $($if the amount is a loss, enter with a minus sign$)?$ Give your answer in JPY to the nearest JPY$.$