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. Consider the data given below. The one-year rates can be viewed as spot interest rates, and the two-year rates are yields to maturity in annualized percent

.two-year one-year U.K. 1.870 1.205 Japan 0.435 0.375

The spot exchange rate is ¥130.15/£.

What should be the two-year forward rate to prevent arbitrage?

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Answer #1

=Spot Yen/Pound*(1+Japan rate)^t/(1+UK rate)^t
=130.15*(1+0.435%)^2/(1+1.87%)^2
=126.509089 Yen/Pound

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