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Assume interest rate parity holds. The one-year risk-free rate in the U.S. is 4.02 percent and...

Assume interest rate parity holds. The one-year risk-free rate in the U.S. is 4.02 percent and the one-year risk-free rate in Japan is 4.35 percent. The spot rate between the Japanese yen and the U.S. dollar is ¥114.33/$. What is the one-year forward exchange rate? Multiple Choice ¥117.53/$ ¥114.33/$ ¥113.97/$ ¥114.69/$ ¥116.56/$

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Answer #1

As per Interest rate parity, Forward exchange rate = Spot Exchange Rate*(1+interest rate Yen)/(1+Interest rate Dollar)

= 114.33(1+0.0435)/(1+0.0402)

= Yen 114.69/$

Hence, the answer is ¥114.69/$

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