Question

The spot rate between the Japanese yen and the U.S. dollar is ¥106.31/$, while the one-year forward rate is ¥105.53/$. The one-year risk-free rate in the U.S. is 2.31 percent. If interest rate parity exists, what is the one-year risk-free rate in Japan?

Select one:

a. 2.68%

b. 1.56%

c. 2.87%

d. 1.39%

e. 3.07%

Answer #1

- Spot rate: ¥106.31per $

- Forward rate: ¥105.53 per $

- Calculating one-year risk-free rate in Japan using Interes rate parity formula:-

1.01559 = 1+ OneYear Risk Free rate in Japan

**OneYear Risk Free rate in Japan = 1.56%**

**Option B**

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the:
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exchange rate will double.
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