The spot rate for the Japanese yen currently is ¥106 per $1. The
one-year forward rate is ¥105 per $1. A risk-free asset in Japan is
currently earning 5 percent. If interest rate parity holds,
approximately what rate can you earn on a one-year risk-free U.S.
security?
Homework Answers
We see that the rate earned on one year risk free US
security=1*(1+Japan risk free rate)*Spot rate/Forward rate-1
=(1+5%)*106/105-1
=6.0000%
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