Question

A US investor can invest $100 US in the US or in Japan. The US interest rate is 8% and the Japanese interest rate is 1%. The current exchange rate is $1 US buys 2.5 Yen, and the investor believes the future exchange rate will be 2.8 Yen. Then the US investment yields a future value of ____ US dollars and the Japanese investment yields ____ US dollars.

Answer 1

US future value 108 dollars

Japan future value 90.18 dollars

Step-by-step explanation:

For the US investment we simply apply the rate and we got the future value

100 x (1 + r) = 108 dollars in the future

For the Japanese investment wewill convert the 100 dollars into YEN

then we apply the rate and convert to the expected exchange rate:

100 US x 2.5 = 250 YEN

250 YEN x (1+1%) = 252.5 YEN (proceeds on YEN in one year)

252.5 / 2.8 = 90,1785714 = 90.18 dollars (final return after conversion)