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Suppose that six-month interest rates (annualized) in Japan and the United States are 7 percent and 9 percent, respectively
Suppose that six-month interest rates (annualized) in Japan and the United States are 7 percent and 9 percent, respectively. If the spot rate is ¥142:$1 and the ninety-day forward rate is ¥139:$1 and the 180 day forward rate is : ¥152:$1
Which would be the best to invest in, where would be the best to borrow from?
Expert Solution
1.Where would you invest?
Convert $ to Yen at the spot rate ¥142:$1 and invest in Japan at 7% for 90 days to receive
= 142*(1+7%/4)=144.485 Yen
Convert this back to $ and receive =144.485/139=1.03946
If invest in US market : (1+9%/4)=1.0225
Since Japanese market gives better return, Invest in Japan.
2.Where would you borrow?
Since borrowing is reverse of investing, borrow in US market as cost is lower here.
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