Question

Use Eigure 211 to answer the following questions. 23 Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 1.3 percent The six-month risk-free rate in Great Britain, Japan, and Switzerland must be percent, and (Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) percent percent, respectively Skipped References

Answer 1

As per interest rate parity, the exchange rate differential equals the interest rate differential.

Forward exchange rate = spot exchange rate * ((1 + interest rate in quote currency) / (1 + interest rate in base currency))^t, where t = time in years.

Great Britain
spot rate £/$ = 0.5920

6-month forward rate £/$ = 0.5929

Forward exchange rate = spot exchange rate * ((1 + interest rate in quote currency) / (1 + interest rate in base currency))^t

Let us say the 6-month risk-free rate in Great Britain is R. Then :

0.5929 = 0.5920 * ((1 + R) / (1 + 1.3%))^6/12

R = 1.61%

Japan
spot rate ¥/$ = 102.32

6-month forward rate ¥/$ = 102.21

Forward exchange rate = spot exchange rate * ((1 + interest rate in quote currency) / (1 + interest rate in base currency))^t

Let us say the 6-month risk-free rate in Japan is R. Then :

102.21 = 102.32 * ((1 + R) / (1 + 1.3%))^6/12

R = 1.08%

Switzerland
spot rate CHF/$ = 0.8793

6-month forward rate CHF/$ = 0.8779

Forward exchange rate = spot exchange rate * ((1 + interest rate in quote currency) / (1 + interest rate in base currency))^t

Let us say the 6-month risk-free rate in Switzerland is R. Then :

0.8779 = 0.8793 * ((1 + R) / (1 + 1.3%))^6/12

R = 0.98%