Spot or Forward Rate
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Investing $1,000,000 for six months. Considering purchasing US T Bills at 1.810% (6 month rate, not annual), matures in 26 weeks. Spot Exchange Rate is $1.00/Yen100, six month forward rate is $1.00/Yes110, Interest rate in Japan is 15%.
I think I should Take the $1m, translate into yet at spot, invest in Japan, hedge with a forward contract because it doesn't mature to 26 weeks and I want to protect my investment with a interest in Japan at 13%.
I really think the interest rate in Japan should be 7.45% before I consider the investment.
Not sure if I'm on the right track.
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Solution Summary
The expert examines the spot or forward rate.
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1. Invest in T bills will yield = 1.0*(1+1.810%)----------1
2. Convert to yen, invest in yen and buy forward ...
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