Question

Question 23 (0.8 points) According to the interest parity condition, if the U.S. interest rate is 2 percent and the Japanese interest rate is 4%, and the current exchange rate is 100 yens per dollar. Then the market expects the future exchange rate to be yens per dollar Question 24 (0.8 points) If the exchange rate at time tis E = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. If Et+1 = €1.02/$, then your rate of return in terms of $ is %, and your rate of return in terms of € is %.

Answer 1

Solution :- (23)

As per Interest parity Condition

Forward Rate ( Yen / $ ) / Spot Rate ( Yen / $ ) = ( 1 + Japan Rate ) / ( 1 + US Rate )

Forward Rate ( Yen / $ ) / Yen 100 = ( 1 + 0.04 ) / ( 1 + 1.02 )

Now Forward Rate ( Yen / $ ) = 100 * 1.04 / 1.02 = 1.019608 * 100 = 101.96 Yen / $

Future Exchange rate 101.96 Yens per dollar

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