We know that the Yen and the Swiss Franc have a 100 yen / 1 sf exchange rate, me

Question

We know that the Yen and the Swiss Franc have a 100 yen / 1 sf exchange rate, meaning one Swiss franc buys 100 yen in the spot Exchange Rate market. The 1-year forward rate is 80 yen / Swiss franc, or 1 Swiss franc buys 80 yen in the forward market. If the Swiss franc has an interest rate of .1, what should the yen rate be for IPT (interest parity theory) to be attained? If the yen rate were 6%, would there be equilibrium? If so, what would transpire? Show both amounts and differentials. Also, show everything in both yen and Swiss franc terms.

I know that Chegg has solved this problem many times but the approach and answers are different each time, making it difficult for me to tell which approach and answer is correct. Please solve this problem for me and show your work step by step so I can understand what I am doing wrong and how I can approach it correctly next time. Also, please clarify where it says show both in amounts and differentials and show everything in both yen and Swiss Franc. Thanks in advance.

Explanation / Answer

Using the IRP theory

Spot rate*(1+ rate in Japan)/(1+ rate in Switzerland) = future rate

100*(1+ rate in Japan)/(1+0.1%) = 80.................( i have taken the rate to be 0.1%)

rate in Japan= 80*1.001/100 - 1

rate in Japan= -19.92%

if the rates were 6% in Japan, then the people would borrow in Swiss Francs and invest the money in Yen. Thus the demand for Yen would increase and it would appreciate leading to a lower exchange rate like 75 Yen/1 CHF

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