Suppose the Spot Market Exchange Rate Is Currently ¥180 =

question 19

Multiple Choice

Suppose the spot market exchange rate is currently ¥180 = £1,the one-year risk-free interest rate in Japan is 2% and the one year risk-free interest rate in Great Britain is 5%. Japanese who buy British bonds without covering their transactions with a forward contract must believe

• A) that the yen will appreciate more than 3% against the pound sterling
• B) that in one year, ¥183.6 will be worth less than £1.05 on the spot market
• C) that interest rates will rise in Japan and fall in Great Britain
• D) that one-year forward exchange rate is £1 = ¥171
• E) that the spot market has undervalued the yen relative to the pound sterling

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Definitions:

Capital Goods

Assets owned by companies for an extended period, instrumental in manufacturing products and providing services, including items like equipment, machinery, and buildings.

Consumer Goods

Products intended for final use by consumers rather than further manufacturing or processing.

Future Growth Rate

An estimate of how fast an economy, company, or investment is expected to grow in the future.

Division of Output

The allocation or distribution of the total goods and services produced among different sectors, markets, or consumers.