Suppose that you are the treasurer of IBM with an extra U.S.$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.What must the interest rate in Japan (on an investment of comparable risk)be before you are willing to consider investing there for six months?
A)1.991 percent
B)1.12 percent
C)7.45 percent
D)−7.45 percent

Question

Quizplus · Accepted Answer

To determine the interest rate in Japan that would make investing there attractive, we need to consider the covered interest arbitrage. The U.S. T-bills yield 1.810%, and the forward exchange rate implies a depreciation of the yen against the dollar. The correct answer, 1.991 percent, reflects the minimum yield in Japan that would make the investment there as attractive as the U.S. T-bills, considering the exchange rate movements and interest rates.

Suppose That You Are the Treasurer of IBM with an Extra