Suppose that in 2023 one- and two-year interest rates are 5.2% in the United States and 1.0%

Question:

Suppose that in 2023 one- and two-year interest rates are 5.2% in the United States and 1.0% in Japan. The spot is ¥120.22/$. Suppose that one year later interest rates are 3% in both countries, while the value of the yen has appreciated to ¥115.00/$.
a. Benjamin Pinkerton from New York invested in a U.S. two-year zero-coupon bond at the start of the period and sold it after one year. What was his return?
b. Madame Butterfly from Osaka bought some dollars. She also invested in the two-year U.S. zero-coupon bond and sold it after one year. What was her return in yen?
c. Suppose that Ms. Butterfly had correctly forecasted the price at which she sold her bond and that she hedged her investment against currency risk. How could she have hedged? What would have been her return in yen?
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...