1. Assume that the annualized discount on forward Canadian dollars is 3 percent. The annualized U.S. interest rate is 8 percent, and the comparable Canadian interest rate is 12 percent. How can a U.S. trader use covered interest arbitrage to take advantage of this situation?
2. Chrysler is planning to sell its new minivan in Japan. Chrysler receives $12,000 for each van sold in the United States and wants to get the same net proceeds from its export sales.
a. If the exchange rate of Japanese yen for U.S. dollars is ¥140 ¼ $1, what price must Chrysler charge in Japan (in yen)?
b. What price will Chrysler have to charge in Japan if the value of the dollar falls to 120 yen?