Question

The US 6-month LIBOR rate is 0.28% while the equivalent Japanese Yen (¥) rate is 0.64%. Given this rate, investing ¥1,000,000 in the Japanese money market will yield how much to the investor? The spot exchange rate is 0.0106 USD/JPY.

Answer 1

US Interest Rate = rd = 0.28% and Japanese Interest Rate = rf = 0.64 %

Investment Amount = 1 million Yen

Current Spot Rate = 0.0106 $ / Y

Assuming that interest rate parity holds, the expected exchange rate 6 months from now would be:

Expected Future Exchange Rate =F1 = 0.0106 x (1.0028) / (1.0064) = 0.010581

Investment Proceeds after 6 months = 1 x 1.0032 = 1.0032 million Y

Investment Proceeds in $ = 1.0032 x 0.010581 = $ 0.010615 million

Initial Investment in $ = 1 x 0.0106 = $ 0.0106 million

Investment Yield in $ denomination = (0.010615 - 0.0106) / 0.0106 = 0.0014151 or 0.14151 %

Investment Yield in Y = 1.0032 - 1 / 1 = 0.0032 or 0.32%