The following data are given Et Y110 100 Et1 Y140 100 one ye

The following data are given: Et Y110 $1.00 Et+1 Y140 $1.00 (one year later) Japan 15% annually iU.S.-15% annually Calculate the future value of $1,000 in one year invested in the United States and Japan. If invested in the United States, the future value is (Round your response to the nearest penny,)

Solution

CASE I

$1,000 invested in United States

Interest rate in United States = 15% or 0.15

Future value = $1,000 (1+0.15)¹

Future value = $1,000 * 1.15 = $1,150

So,

If invested in the United States, the future value is $1,150.

CASE II

$1,000 invested in Japan

Interest rate in Japan = 15% or 0.15

Converting dollar into Yen at spot rate

Spot rate = 110 yen per dollar

So, Number of Yen = 1,000 * 110 = 110,000 Yen

Value after one year = 110,000 * (1+0.15)¹ = 110,000 * 1.15 = 126,500 yen

Converting back to dollars at forward exchange rate -

Forward rate = 140 yen per dollar

Number of dollars = 126,500/140 = $903.57

So,

If invested in the Japan, the future value is $903.57