Q 5(c) [10 Marks]
Dries is a risk-neutral investor based London. He intends to exploit the
from UIP between AUD and JPY since the Japanese interest rate is 1% while the
Australian interest rate is 10%. From the newspaper he reads that AUD is expected
to depreciate by 1% against JPY, and the JPY will depreciate by 7% against GBP.
What would be the expected excess return in GBP on his carry trade strategy?