Suppose Interest Rates Are 3 Percent in Japan and 6

question 14

Multiple Choice

Suppose interest rates are 3 percent in Japan and 6 percent in Canada. The current value of the exchange rate is 110 Japanese yen per dollar, and it is generally expected that in one year the exchange rate will be 106.7 yen per dollar. Under these circumstances,

• A)interest rate parity is violated.
• B)an international investor could make money by borrowing in Japan and lending in Canada, assuming no transaction costs.
• C)an international investor could make money by borrowing in Canada and lending in Japan, assuming no transaction costs.
• D)interest rate parity is not violated.
• E)A and C are true.

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