Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper would earn a higher rate of return by buying yen and a forward contract than if he had invested her money in 6-month US Treasury securities at an annual rate of 2.50%.

Question

Quizplus · Accepted Answer

The forward rate is lower than the spot rate, indicating that the yen is expected to appreciate against the dollar. However, to determine if Jasper would earn a higher return, we need to compare the implied forward rate return with the US Treasury rate. The calculation shows that the implied return from the forward contract is less than the 2.50% annual rate from US Treasury securities, so investing in US Treasuries would yield a higher return.

Jasper Pernik Is a Currency Speculator Who Enjoys "Betting" on Changes