Please Show Work at interest rate parity holds. In both the spot market and the

Question

Please Show Work

at interest rate parity holds. In both the spot market and the 90-day forward market, I Japanese yen equals 0.0086 dollar. In Japan, 90-day risk-free securities yield (17-7) Assume th st Rate Parity 4.6%, what is the yield on 90-day risk-free securities in the United States? (27-8) In the spot market, 7.8 pesos can be exchanged for 1 U.S. dollar. A pair of headphones Purchasing costs $15 in the United States. If purchasing power parity holds, what should be the price Power Parity of the same headphones in Mexico?

Explanation / Answer

17-7

Spot Rate = Forward arte = $0.0086 pr Yen.

90 days risk free rate in Japan is 4.60%.

If interset rate parity holds true, and spot rate equal to forward rate. So, 90 days risk free rate in both country should be similar. So 90 days risk free rate in USA is 4.60%.

17-8

Price of Headphone in Mexico = $15 × 7.80

= 117 Peso.

Price of Headphone in Mexico is 117 Peso.

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