Question

Consider the following information: spot $/Yen = 0.01     1-year r_US= 2%     1-year r_Japan = 4%

If interest rate parity holds what is the 1 year forward $/Yen exchange rate?

0.1020

102.5432

0.0098

98.5532

Answer 1

Solution:
	Answer is 3rd option is 1 Year Forward rate (FR) YEN 1 = $ 0.0098
Working Notes:
	Spot rate , Yen 1 = $ 0.01
	1 year forward exchange rate(FR) = ??
	In above Exchange rate ,Yen is Base currency & $ is Price currency
	interest rate of $ =2%     interest rate of YEN =4%
	As per IRP (interest rate parity)
	1 Year Forward rate (FR) = Spot rate (SR) x (1+ interest rate of $) / ( 1 + interest rate of YEN )
	1 Year Forward rate (FR) = 0.01 x (1+ 2% ) / ( 1 + 4% )
	1 Year Forward rate (FR) = 0.01 x (1+ 0.02) / ( 1 + 0.04 )
	1 Year Forward rate (FR) = 0.009807692
	1 Year Forward rate (FR) YEN 1 = $ 0.0098
Please feel free to ask if anything about above solution in comment section of the question.