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If the interest rate on short term US government debt is 0.7, the comporarable rate for...

If the interest rate on short term US government debt is 0.7, the comporarable rate for Japanese government debt is 2, and you can buy 130 yen with a dollar, how many yen will you be able to buy with a dollar 1 year from today?

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Answer #1

Spot rate (Yen / Dollar) = 130 / 1

Interest rate (Yen) = 2%

Interest rate (Dollar) = 0.7%

Forward rate (Yen / Dollar) = Spot rate (Yen / Dollar) * (1 + Interest rate (Yen)) / (1 + Interest rate (Dollar))

Forward rate (Yen / Dollar) = 130 * (1 + 2%) / (1 + 0.7%)

Forward rate (Yen / Dollar) = 131.6783

Thus, 1 year from today, using 1 Dollar, we will be able to buy 131.6783 Yen.

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