1. You can borrow up to 100mn Japanese yen over a 90 day period at 1%pa interest and lend Japanese yen at 0%pa interest. You can borrow up to 1mn USD over a 90 day period at 3%pa interest and lend USD at 2%pa interest.
The current spot exchange rate quote between the two currencies is
102.076-102.093
The 90 day forward quote is
101.052-101.076
Identify and explain any arbitrage opportunity - or if no arbitrage opportunity exists, explain why this is the case.
2. Using the IS-LM-FE model, and assuming a floating exchange rate, analyse the full consequences for the exchange rate, interest rates and output of an increase in the precautionary demand for money. Assume imperfect capital mobility.
3. Without providing any diagrams, explain how the consequences of such a change in the demand for money would differ if the exchange rate was fixed.