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According to covered interest rate parity, what must the 1-year Japanese yen/US dollar forward rate assuming...

According to covered interest rate parity, what must the 1-year Japanese yen/US dollar forward rate assuming the following: E¥/$ = 123.85 (¥/$ spot rate), i¥ = 1.00% and i$ = 5.50%.

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Answer #1

Formula for covered interest rate parity as follows-

Covered Interest Rate Parity Formula Under the covered interest rate parity, the following formula must hold true, otherwise, there would be an arbitrage opportunity: (1 id) (S/F)* (1 f) The formula above can be rearranged to determine the forward foreign exchange rate, in which F S Where: is the interest rate in the domestic currency ort ip is the interest rate in the foreign currency or the quoted currency S is the current spot foreign exchange rate F is the forward foreign exchange rate.

Hence ans : 118.5673

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