Answer to Question #152327 in Financial Math for no one

Question

A one-year Japanese security is currently yielding 5%. Furthermore, it is expected that the exchange rate between the dollar and the yen is changing from 98 yen to the dollar, to 95 yen to the dollar over the next year. To invest in U.S. security rather than Japanese security, you would need a return at least equal to what value?

Answer 1

We can see that japanese security is giving yield of 5%

And US currency is expected to deprecate over next year and japanese currency appreciates

Which will be around = (98-95)/98 , which is 3.06%.

So investing in Japanese security not only gives yield of 5% but also currency appreciation of 3.06%.

So to invest in US security we need atleast both the above returns which will be 8.06%.