1. Suppose an individual firm is comparing two investments, a one year bond from a Japanese firm paying 2% or a one year

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1. Suppose an individual firm is comparing two
investments, a one year bond from a Japanese firm paying 2% or a
one year bond from a U.S. firm which is paying 8%. The current
yens-per-dollar rate is 125, and the expected rate in one year is
100. If the expected rate is correct, which investment will receive
the higher return? Show how he/she can obtain an arbitrage profit.
Compute the profit in percentage return.
2. Consider the following prices from banks in the U.S.
and U.K.:
Assume that you can borrow up to $1,350 or £1,000.
Show how to realize a certain profit via covered interest
arbitrage, Provide net profit after arbitraging.
180-day $ interest rate:
2.5% p.a.
180-day £ interest rate:
5.0% p.a.
Spot exchange rate:
$1.35 / £
180-day forward exchange rate:
$1.30 / £