Suppose you have $1,000,000 to invest for one year. One-year interest rate is 1% in Japan and 4% in the United States. The current exchange rate is 120 yen per dollar, and you can enter a one-year forward contract with the exchange rate of 115 yen per dollar. Which county should you invest in and why?

Suppose you have $1,000,000 to invest for one year. One-year interest rate is 1% in Japan and 4% in the United States. The current exchange rate is 120 yen per dollar, and you can enter a one-year forward contract with the exchange rate of 115 yen per dollar. Which county should you invest in and why?

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 5CQQ

See similar textbooks

Similar questions

Use the demand-and-supply of foreign currency graph to determine what would happen to a small, open economy that experienced capital outflows.
If a countrys currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the Interest rate paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect a currencys demand and supply.
Let's suppose you have $1 million to invest. You are considering to invest in UK first, then convert the British Pound back to US$ in the future. You know following information: Annual Interest rate on investment in US: 2% Annual Interest rate on investment in UK: 4% Investment period: 1 year Current exchange rate: 1.48 $/BP Forward exchange rate which you can apply when converting BP to US$: 1.47 $/BP What would be profit if you apply the covered-interest arbitrage? Group of answer choices None of the above About $48,382 About $40,542 About $24,254
After considering investing foreign investment in the recommended countries, what sort ofexchange rate risk DAMC may face. In your explanations give some historical trends of exchange rates of AUD vs currency of your selected countries and how do you forecast such exchange rates to be in short-term and medium-term future? currencies are brazilian real and mexican peso
Suppose that the treasurer of IBM has an extra cash reserve of $500,000 to invest for six months. The six-month interest rate is 4.5 percent per annum in the United States and 3.3 percent per annum in Germany. Currently, the EUR/USD is 1.2224 and the six-month forward exchange rate is1.2352. The treasurer of IBM does not wish to bear any exchange risk. How much would IBM have if they choose to invest in Europe hedging their risk? (USD, no cents)
If a cup of coffee costs 2 euros in Paris and $6 inNew York and purchasing-power parity holds, what isthe exchange rate?a. 1/4 euro per dollarb. 1/3 euro per dollarc. 3 euros per dollard. 4 euros per dollar
Suppose that the current spot exchange rate is 60.830/s and the three-month forward exchange rate is €0.815/S. The three-month interest rate is 6.00 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or 6830,000. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit
For a European investor, what is the rate of return in euro on: “a ¥10,000 deposit in a Japanese bank in a year when the interest rate on Yen is 12 % and the Yen per euros exchange rate moves from ¥1.40 per euros to ¥1.20 per euros” A. Compute the rate of return without the formula B. Compute the approximation of this rate of return using the formula Only typed answer
Question 2 Consider the choice between the New Zealand (NZ) and the US one-year bonds from the point of view of a NZ investor. The one-year NZ nominal interest rate is 5.0%, and the one-year US nominal interest rate is 3.25%. The current exchange rate, E, stands at 1 NZ dollar per 0.58 US dollar. Compute the expected exchange rate next year, E to the power of e end exponent, consistent with uncovered interest parity. Full explain this question and text typing work only thanks
Let's suppose you have $1 million to invest. You are considering to invest in UK first, then convert the British Pound back to US$ in the future. You know following information: Annual Interest rate on investment in US: 2% Annual Interest rate on investment in UK: 1% Investment period: 1 year Current exchange rate: 1.52 $/BP Forward exchange rate which you can apply when converting BP to US$: 1.53 $/BP What will be profit or loss if you apply the covered-interest arbitrage? Profit, about $16645 (this is correct answer. I need step by step instruction)