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Assume that the 1 year forward exchange rate is 100 yen for 1 US dollar. Interest...

Assume that the 1 year forward exchange rate is 100 yen for 1 US dollar. Interest rate in dollars is 1 percent with annual compounding. Interest rate in yen is 0.3 percent with annual compounding. What is the spot exchange rate. PLEASE SHOW FORMULA AND CLEAR CALCULATION

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Answer #1

Calculation of spot exchange rate:

Spot exchange rate= Forward rate*(1+dollar interest rate)/(1+yen interest rate)

                            =100*(1+0.01)/(1+0.003)

                            =100*1.007

                            =100.70

Spot exchange rate is 100.70 yen for 1 US dollar

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