1.Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0

Question

1.Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.01, while in the 180-day forward market 1 Japanese yen = $0.0105. 180-day risk-free securities yield 1.35% in Japan. What is the yield on 180-day risk-free securities in the United States? Round your answer to 2 decimal places. Do not round intermediate calculations.
--------- %

B. Suppose that 1 Swedish krona could be purchased in the foreign exchange market today for $0.43. If the krona appreciated 9% tomorrow against the dollar, how many kronas would a dollar buy tomorrow? Round your answer to 2 decimal places. Do not round intermediate calculations.
--------kronas

C. Suppose the exchange rate between the U.S. dollar and the South African rand was 18 rand = $1 and the exchange rate between the U.S. dollar and the Israeli shekel was 1 shekel = $0.2. What was the exchange rate between the South African rand and the Israeli shekel? Round your answer to 2 decimal places. Do not round intermediate calculations.
--------rands per shekel

Explanation / Answer

1.Interest rate parity: Forward rate = spot rate*(1+interest rate of other country)/(1+interest rate of home country interest rate)

$0.0105 = $0.01*(1+interest rate in U.S) / (1+0.0135)
$0.0105*1.0135 = $0.01*(1+interest rate in U.S.)
Interest rate in U.S. = [($0.0105*1.0135)/$0.01] – 1 = 0.06%

2. $0.43 x (1-percentage change) => $0.43 x (1-.09) = $0.3913

3. Shekel per dollar = 1/$0.2 = 5 Shekel
     So, Rand per Shekel = 18/5 = 3.6 Rand/Shekel

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