M&B3 3rd Edition by Dean Croushore

Exercise 3

Suppose that you are an investor who is considering buying a one-year U.S. government bond that has a 5 percent interest rate or a one-year Japanese government bond with a 1 percent interest rate. The exchange rate today is 110 yen per dollar, and you expect the exchange rate to be 105 yen per dollar one year from now
a Which bond would you purchase Why
b Suppose that the exchange rate today is 107 yen instead of 110 yen. Would you change your decision about which bond to buy
c Suppose that the exchange rate is 110 yen today, and you think that there is a 20 percent chance that the exchange rate will be 100 yen in one year and an 80 percent chance that the exchange rate will be 108 yen in one year. Would you change your decision about which bond to buy