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7) (¥: Japanese Yen, €: Euro) Given that the spot (¥ / €) = 100, an investor who has ¥5,000 expects € to go up by 10% against ¥ during the next year. If the investor borrows another 5.000, with a borrowing rate of 5%, and invests all of them in € now (the investor coverts a total of ¥ 10,000 to € from the sport rate); 4 4750 - 45000 - = -0.05 a) What will the investor's rate of return be if the € does not change at all against ¥ by the year's end? (10 Points) Today = $10,000 & 4/4100=€ 100 One year later £100 % 4/6100 = 4 10,000 pricipal + Interest : 45000 X (1+5)) = 45250 410,000 - 45250 = 4 4150 . Rate of Retum End- Begin Begin 45000 = -5% b) What will the investor's rate of return be if the € indeed appreciates by 10% against ¥ by the year's end? (20 Points) Appreciates 4 10% 41€100 ( 1+10%) = 41€ 110. Today= $10,000 & 4/4100 = €100 One year later: € 160 x 41€ 110 - 411000 Pricipal + Interest 45000X (1+5%) = 45250 4 11,000 - 45250 = 45750 Rate of Return= 45756-45000 = 0.15 45000 < = 15%

Answer 1

Answer:

Given

Spot rate (Y/E)=100

Own Amount =Y5000

borrowed money =Y5000

one year interest on borrowed money=5000*(1+5%)-5000=Y250

Pincipal + Interest = 5000+250=Y5250

Total Invested amount =Y10000

So In euro invested amount=10000/100=E100

Let X be the rate of increase in Euro so one year later Y/E=100*(1+x)

So one year later total value of investment in Yen =100*100*(1+X)=10000*(1+X)

Since given return =0

So 10000*(1+X)-5250-5000=0

1+X=1.025

X=2.5%