Explain the concepts of present value and future value

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1. Explain the concepts of present value and future value.

2. If the dollar interest rate is positive, explain why the value of $1,000,000 received every year for 10 years is not $10,000,000 today.

3. Describe how you would calculate a 5-year forward exchange rate of yen per dollar if you knew the current spot exchange rate and the prices of 5-year pure discount bonds denominated in yen and dollars. Explain why this has to be the market price.

4. If interest rate parity is satisfied, there are no opportunities for covered interest arbitrage. What does this imply about the relationship between spot and forward exchange rates when the foreign currency money market investment offers a higher return than the domestic money market investment?

Reference no: EM13897882

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