Suppose Japanese yen money market annual rate is .60% and U.S. money market has an annual rate of… 1 answer below »

Suppose Japanese yen money market annual rate is .60% and U.S. money market has an annual rate of 4.50%.

1). The predictions on the spot rate in 6 months made by financial analysts X and Y are A??Y116/$ and A??Y114/$ respectively. If the spot rate today is A??Y115/$, which prediction do you think is more reasonable, why?

2). What should be the spot rate in 6 months based on parity condition?

3). If the forward rate in 6 months is A??Y113/$, will there be arbitrage opportunity, why? If yes then which investment strategy will offer you profit (hint: borrow or lend, dollar or yen, buy or sell forward)?

4). Suppose you adapt the correct arbitrage strategy with the starting investment value of $43,478.2609 or A??Y5,000,000, what will be the net proceeds? Please show each step clearly.

5). If financial analyst X believes his prediction is right, then what he would do to explore the market profit opportunity?

6) What is the key difference between the strategy adopted by analyst X in part 5 and the strategy in part 4?

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