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U.S. 5% Nominal one year interest rate Spot rate France 9% $1.17 Japan 8% $0.010 Interest rate parity exists between the U.S. and France as well as the U.S. and Japan. The international Fisher effect exists between the U.S. and France as well as the U.S. and Japan. Bill (based in the U.S.) invests in a one-year CD (certificate of deposit) in Japan and sells Japanese Yen one year forward to cover his position. Erica (based in Japan) invests in a one-year CD in France and does not cover her position. What are the returns on funds invested for Bill and Erica respectively? Please justify your explanation both in terms of theory and calculations. (Hint: You can get the exchange rate between euro and Japanese Yen from their respective rate to USD) ANS: Please clearly label your return calculations, i.e., the investment return for Bill and Erica respectively. 1. (5 Points You are given the following information: U.S. France Nominal one year interest rate 5% 9% Spot rate $1.17 Japan 8% $0.010 Interest rate parity exists between the U.S. and France as well as the U.S. and Japan. The international Fisher effect exists between the U.S. and France as well as the U.S. and Japan. Bill (based in the U.S.) invests in a one-year CD (certificate of deposit) in Japan and sells Japanese Yen one year forward to cover his position. Erica (based in Japan) invests in a one-year CD in France and does not cover her position. What are the returns on funds invested for Bill and Erica respectively? Please justify your explanation both in terms of theory and calculations. (Hint: You can get the exchange rate between euro and Japanese Yen from their respective rate to USD) ANS: Please clearly label your return calculations, i.e., the investment return for Bill and Erica respectively

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