Homework Answers
Spot exchange rate (yens per dollar), Et = yen 115/$1
Forward exchange rate (yens per dollar), Et+1 = yen 124/$1
US interest rate, RUS = 10% or 0.10
According to the Interest rate parity condition -
[1 + RJapan]/[1 + RUS] = [Et+1]/Et
[1 + RJapan]/(1 + 0.10) = 124/115
[1 + RJapan]/1.10 = 1.0783
1 + RJapan = 1.0783 * 1.10
1 + RJapan = 1.1861
RJapan = 1.1861 - 1 = 0.1861 or 18.61%
The interest in Japan should be equal to 18.61%.
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