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Suppose that Japanese yen futures are currently trading at a premium against the dollar
Suppose that Japanese yen futures are currently trading at a premium against the dollar. Based on the covered interest rate parity, it can most likely be concluded that:
Select one:
a.
The exchange rate risk of the Japanese yen is low
b.
yen interest rates are higher than those of the dollar and therefore the yen must appreciate
c.
Yen interest rates are lower than those of the dollar, so the yen must appreciate
d.
None of the above
Expert Solution
F = S x (1 + id) / (1 + if)
F is the forward rate, S is the spot rate, id is the domestic rate (US rate) and if is the foriegn rate (Japanese rate)
Since F is trading at a premium, F > S, therefore from the equation we can conclude that id > if , so the Japanese rates are lower than the US rates.
c. Yen interest rates are lower than those of the dollar, so the yen must appreciate
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