ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Assume that you start by borrowing either $100,000 or 10,500,000 Japanese Yen. Using a starting yen per dollar exchange of 105 Yen per dollar and a oneyear US interest rate of 5% and one-year Japanese interest rate of 0.5%. Explain how a hedge fund can use the carry trade to make profits or incur losses. In your answer, show the profits or losses in both dollars and yen in the following four cases [(i) to (iv)] making it clear in each case what the profit or loss is in both yen and dollars.
(a) The exchange rate stays the same at 105 yen per dollar.
(b) The exchange rate moves to 75 yen per dollar
(c) The exchange rate moves to 125 yen per dollar
(d) State the breakeven exchange rate for the carry trade
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