If Japanese Yen Floating Rates Are Well Below US Dollar

question 19

Multiple Choice

If Japanese yen floating rates are well below US dollar floating rates, then a fairly-priced basis swap that exchanges Japanese floating rates (plus a spread) for US floating rates must have

• A) a positive spread to compensate for the lower Japanese interest rates.
• B) a negative spread to compensate for the likely appreciation of the yen against the dollar.
• C) zero spread.
• D) Any of the three are possible.

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