Use the information below to answer the following questions. Currency per U.S. A

Question

Use the information below to answer the following questions. Currency per U.S. Australia dollar Japan yen U.K. pound 6-months forward 6-months forward 6-months forward 1.2387 1.2346 100.4300 99.9500 6795 6778 Suppose interest rate parity holds, and the current risk-free rate in the United States is 4 percent per six months. Use the approximate interest rate parity condition to answer this question What must the six-month risk-free rate be in Australia? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate What must the six-month risk-free rate be in Japan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate What must the six-month risk-free rate be in Great Britain? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate

Explanation / Answer

a.

Risk free rate = [1.2346 - 1.2387] / 1.2387 + 0.04

= 0.03669 or 3.67%

b. Risk free rate = [99.9500 - 100.4300] / 100.4300 + 0.04

= 0.03522 or 3.52%

c. Risk free rate = [0.6778 - 0.6795] / 0.6795 + 0.04

= 0.037498 or 3.75%.

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