Homework Answers
The annualized forward discount when the Japanese yen/U.S. dollar exchange rates are JPY118.25 per USD and JPY116.85 per USD quoted on a one month forward contract is 14.21%
Solution:
Spot Rate = JPY118.25 per USD
One Month Forward Rate = JPY116.85 per USD
This is forward Discount as one month forward exchange rate is lower than spot rate
One Month Forward Discount = (One month forward Rate - Spot Rate) / Spot Rate
= (JPY116.85 per USD - JPY118.25 per USD) / JPY118.25 per USD
= -1.4 / 118.25
= -1.18393235%
Annualized Forward Discount = One month forward discount * 12 months
= 1.18393235 % *12
= 14.2071882%
Therefore, Annualized Forward Yeild = 14.21%
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