$\quad$ $\quad$ $\quad$ $\quad$ $\quad$

Multiple Choice

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Table 5.2
$$\begin{array} { | c | c | c | c | c | } \hline \begin{array} { c } \text { Scenari } \\\mathbf { 0 }\end{array} & \begin{array} { c } \text { Current interest } \\\text { rate-Canada }\end{array} & \begin{array} { c } \text { Current interest } \\\text { rate-Japan }\end{array} & \begin{array} { c } \text { Current exchange } \\\text { rate }\end{array} & \begin{array} { c } \text { Expected exchange } \\\text { rate in } \mathbf { 1 } \text { year }\end{array} \\\hline \mathbf { A } & 2 \% & 4 \% & ¥ 100 = \$ 1 & ¥ 103 = \$ 1 \\\hline \mathrm { B } & 3 \% & 6 \% & ¥ 100 = \$ 1 & ¥ 102 = \$ 1 \\\hline \mathrm { C } & 5 \% & 2 \% & ¥ 100 = \$ 1 & ¥ 97 = \$ 1 \\\hline \mathrm { D } & 4 \% & 7 \% & ¥ 100 = \$ 1 & ¥ 106 = \$ 1 \\\hline\end{array}$$
Suppose that you intend to invest $10 000 in one-year government bonds. You are looking for the highest return on your investment and do not care whether you invest in Canada or Japan, but as a Canadian resident, you want your investment return to be in Canadian dollars. Table 5.2 lists four scenarios, each showing the current interest rate for one-year government bonds in Canada and Japan, the current exchange rate between the dollar and the yen, and the expected exchange rate in one year. Other than the interest rates, you assume the bonds from each country to be identical.
-Refer to Figure 5.2In which scenario does the interest parity condition hold?

A) A
B) B
C) C
D) D