Money and foreign exchange markets in Japan and Swiss are quite efficient. You have the following information:
Japan Germany
Spot exchange rate ¥100/DM SF0.01/¥
Expected inflation rate 2% per annum 5% per annum
One-Year ‘T-bll’ rate Unknown 8% per annum
a. What is you estimate of the one-year T-bill rate in Japan?
b. What is your estimate of the one-year forward exchange rate between Japanese yen and SF?
c. What is your best estimate of the one-year future spot exchange rate between Japanese yen and SF?