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) U.S. 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.