Suppose that the interest rate on a US dollar deposit is 3% and the interest rate on a Japanese yen deposit is 1%. Today’s exchange rate is $1/¥ and the expected rate one year in the future is $1.2/¥, so $100 today can be exchanges for ¥100. Which currency deposit yield a higher expected rate of return (which currency investors should be willing to hold)? Why?

You are analyzing a very low-risk project with an initial cost of €120000. The project is expected to return €40000 the first year, €50000 the second year and €60000 the third year. The current spot rate is €.54. The nominal return relevant to the project is 4 percent in the U.K. and 3 percent in the U.S. using the home currency approach, what is the net present value of this project in U.S dollars?

Suppose that the term structure of risk-free interest rates is flat in the United States and Australia. The USD interest rate is 5.9% per annum and the AUD rate is 5.7% per annum. The current value of the AUD is 0.57 USD. Under the terms of a swap agreement, a financial institution pays 2.0% per annum in AUD and receives 5.0% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the USD value of the swap to the financial institution? Assume all interest rates are continuously compounded. Enter your answer rounded to the nearest integer,

Suppose that Mullen Co, a U.S.-based MNC, knows that it will need 200,000 pounds in one year in order to purchase supplies. It is considering a currency call option to hedge this payable. Currency call options on the pound with expiration dates in one year currently have an exercise price of $1.20 and a premium of $0.04. On the following graph, use the blue points (circle symbols) to plot the contingency graph for hedging this payable with a call option. Plot the points from left to right in the order you would like them to appear. Line segments will connect automatically. Plot the 3 blue points for the following pound spot rates: $1.16, $1.20, $1.26. Note: The vertical axis measures dollar cash outflows from the hedge, which includes the price paid for pounds and any option premium. Dollar Cash Outflows from Hedge (Dollars per Pound) 1.26 1.25 1.24 1.23 1.22 1.21 1.20 1.19 1.18 1.17 1.16 1.15 1.14 + 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 1.25 Pound Spot Rate in One Year (Dollars…