Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen. In th

Question

Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen. In the 90-day forward market, $1 = 1.84 Swiss francs and $1 = 127 Japanese yen. Assume that interest rate parity holds worldwide. Which of the following statements is most CORRECT?




a)Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Swiss securities.


b)Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Japanese securities.


c)Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Japanese securities.

d)Since interest rate parity holds interest rates should be the same in all three countries.

e)Interest rates on 90-day risk-free U.S. securities equal the interest rates on 90-day risk-free Swiss securities.

**PLEASE EXPLAIN HOW YOU DERIVED ANSWER, THANKS!

Explanation / Answer

Today in the spot market $1 = 1.82 Swiss francs and $1 = 130 Japanese yen. In the 90-day forward market, $1 = 1.84 Swiss francs and $1 = 127 Japanese yen. Assume that interest rate parity holds worldwide. Which of the following statements is most CORRECT?

Interest rates on 90-day risk-free U.S. securities are higher than the interest rates on 90-day risk-free Japanese securities.

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