The following information was available:spot rate for Japanese yen: $0.009313; 730 day forward rate for Japanese yen:$0.010475 (assume a 365 day year); US risk free rate: 7.0 percent; Japanese risk-free rate: 1.0 percent.
a. Assuming annual compounding, determine whether interest rate parity holds and, if not, suggest a strategy.
b. assuming continuous compounding, determine whether interest rate parity holds and if not, suggest a strategy.