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 ¥116/$ and ¥114/$ respectively. If the spot rate today is ¥115/$, which prediction do you think is more reasonable, why?
2) What should be the spot rate in 6 months based on parity condition?
3) If the forward rate in 6 months is ¥113/$, 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 ¥5,000,000, 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?