The one-year interest rate in Japan is -0.20% (.0020). The one-year interest rate in the U.S. is 1.00% (.01).
a) What is the interest rate differential (iU.S. – iJapan)?
b) For interest rate parity to hold, the dollar needs to decrease by the amount above. If the current spot rate is 110.53 JPY/USD, and the one-year forward rate is 108.50 JPY/USD, how much is the dollar expected to depreciate by over the next year?
c) For arbitrage profit, you want to borrow in ______________ and lend in _______________.