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a. Austin should not consider financing with yen and simultaneously purchasing yen 1 year forward because the effective financing rate would be 7 percent, the same as the financing rate in the United States.

b. If Austin finances with yen without covering this position, then its effective financing rate is expected to exceed the interest rate on the yen because of the expected appreciation of the yen over the financing period. However, the effective financing rate is not expected to be as high as the interest rate on the dollar.

c. If the yen's spot rate in 1 year is higher than today's forward rate, then the effective financing rate will be higher than the U.S. interest rate of 7 percent.

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Statistics and Probability, Statistics

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