Exchange Rate Relationships
Example - You have the opportunity to invest
$1,000,000 for one year. All other things being
equal, you have the opportunity to obtain a 1 year
Japanese bond (in yen) @ 0.25 % or a 1 year US
bond (in dollars) @ 5%. The spot rate is 112.645
yen:$1 The 1 year forward rate is 107.495 yen:$1
Which bond will you prefer and why?
Ignore transaction costs.