Assuming no transaction costs, if a US investor can make risk free profits by borrowing the Japanese yen, then: a the hedged japanese interest rate is low relative to the US interest rate b 1+rd < (1+rf)(Forward rate) / spot rate c the US interest rate is low relative to the japanese interest rate d the interest rate differential is approximately equal to the forward premium
A?
I remember seeing this in schweser book 2. the answer is A, but i think the question is incomplete.
Answer is A I would have thought B or C (seem one and the same), but just dont understand why you would borrow Japanese yen when the japanese rate is lower relative to the US.
i dont think the question is incomplete if you can make a risk free profit from borrowing japaneze yen that means interest rates in japan -adjusted to currency, are smaller than what they would be in us
1+rd>Fx(1+rf)/S US interest rate is high relative to hedged Japanese interest rate. A.
Borrow yen to invest in US… doh!