extra credit - NickJordan MGMT370 ExtraCredit 1...

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Nick Jordan MGMT 370 Extra Credit 1) There is a 3% difference in inflation. By purchasing power parity, this should mean a 3% appreciation in the value of the yen. If not, the prices of Japanese products would be too low, and everyone would rush to buy them, driving up the price of the yen. The yen is worth .010571. The difference in inflation predicts that the yen would rise by 3%. The predicted future value of the yen is .010571 x 1.03 = .01088813 $ / ¥ 2) To compare, you need to subtract the premium you would have to pay from the interest rate you would get in the U.S., and then compare that with the interest rate in Japan. Premium = {(.008245 - .008201) / .008201} x (12 / 3) x 100 = +2.14 % You PAY the premium to buy the contract, rather than receive it, so you subtract it from the US return. US Interest rate of 2.25% - Premium of 2.15 % = +0.10% is just a bit more than the Japanese interest rate of 0.1%. Evidence that Interest Rate Parity is working pretty well in this case. Returns are essentially equal.
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This note was uploaded on 02/10/2009 for the course MGMT 370 taught by Professor Tomroehl during the Fall '08 term at Western Washington.

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extra credit - NickJordan MGMT370 ExtraCredit 1...

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