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The nominal yield on 6-month T-bills is 4%, while default-free Japanese bonds that mature in 6...

The nominal yield on 6-month T-bills is 4%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5%. In the spot exchange market, 1 yen equals $0.01. If interest rate parity holds, what is the 6-month forward exchange rate? Round the answer to five decimal places. Do not round intermediate calculations.

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Answer #1

ANSWER = 0.00995

where,

rf = default free interest rate = 5% / 2 = 2.5%

[The rate is divided by 2 because it is given for 12 months and we only need it for 6 months.]

rh = home country interest rate = 4% / 2 = 2%

[The rate is divided by 2 because it is given for 12 months and we only need it for 6 months.]

Spot exchange rate = $0.01

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