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Suppose the interest rate in Japan is 1% p. a. and the interest rate in...

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Finance

Suppose the interest rate in Japan is 1% p. a. and the interest rate in the US is 2.5% p. a. Assume borrowing and investing occur at these rates. The spot rate is 100 per dollar. Assume that an investor borrows $100 and converts it to yen and invests for a year in a yen denominated bond. What is the one year ahead forward rate that will make covered interest arbitrage not profitable? [Please note that the exchange rates are stated in indirect terms.]

101.0 per dollar

101.5 per dollar

102.0 per dollar

102.5 per dollar

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