The spot rate for the Japanese yen currently is ¥120 per $1. The one-year forwar

Question

The spot rate for the Japanese yen currently is ¥120 per $1. The one-year forward rate is ¥119 per $1. A risk-free asset in Japan is currently earning 8 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free U.S. security?

8.83 percent

8.99 percent

7.10 percent

7.18 percent

8.91 percent

The spot rate for the Japanese yen currently is ¥120 per $1. The one-year forward rate is ¥119 per $1. A risk-free asset in Japan is currently earning 8 percent. If interest rate parity holds, what rate can you earn on a one-year risk-free U.S. security?

Explanation / Answer

In one year Yen will appreciate and dollar will relatively depreciate.

The interest are aftre one year = 119x1.08/120 -1 = 0.071

The interest rate aftre one year in US = 7.10%

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