90 day risk free securities in the united states

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Question 1  Assume that interest rate parity holds, in both the spot market and the 90 day forward market, 1 japanese yen equals 0.0086 dollar. In japan, 90 day risk free securities yield 4.6%. what is the yield on 90 day risk free securities in the united states? 

Question 2 Assume that interest rate parity holds and that 90 day risk free securities yield 5% in the US and 5.3% in Germany. In the spot market, 1 euro equals $0.80 dollar.

A)    is the 90 day forward rate trading at a premium or a discount  relative to the spot rate? 

B)    what is the 90 day forward rate ? 

C)     Now assume that the 90-day forward rate is $0.79 per Euro. Does the Interest Rate Parity (IRP) hold now? Are there arbitrage opportunities and why? If yes, where would you borrow and where would you invest and why? Arrange arbitrage transactions. Assuming no transaction costs, what would be your arbitrage profit in % on an annual basis per 1,000 $s or Euros borrowed?

Reference no: EM13835440

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