Question

Based on the following information calculate 3 months forward rate between USD and JPY

The interest rate of USD = 1.36%

The interest rate of JPY = 0.76%

Spot Rate = 107.50

Day Convention for JPY =     Actual/360

Day Convention for USD = Actual/360

Answer 1

Spot Rate is;

1USD=107.50 JPY

LHS currency=USD

RHS currency=JPY

As per Interest Rate Parity theoram(PPP)

FR/SR=(1+RHS currency Interest Rate*/1+LHS currency Interest Rate)

FR=(1+RHS currency Interest Rate/1+LHS currency Interest Rate)*SR

Since we have to find the 3-month Forward Rate,hence we have to convert the interest rate for 3-month

RHS currency Interest Rate= 0.76%*3/12

=.19%

LHS currency Interest Rate=1.36%*3/12

=.34%

3-month FR=(1+...19%/1+.34%)*107.50

=(1.0019/1.0034)*107.50

=107.34

Thus 3-month forward between USD and JPY is '1 USD=107.34 JPY'