Question

Problem 17-02 Interest Rate Parity The nominal yield on 6-month T-bills is 6%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 4.5%. In the spot exchange market, 1 yen equals $0.011. If interest rate parity holds, what is the 6-month forward exchange rate? Round the answer to five decimal places. Do not round intermediate calculations.

Answer 1

Spot exchange rate = $0.01100 per yen

6 months t bill rate in US = 6% annual = 3% semi annual

6 months default free rate in Japan = 4.5% annual = 2.25 % semi annual

6 months Forward rate = Spot rate * ( 1 + semi annual US rate ) / ( 1+ semi annual Japan rate )

6 months Forward rate = 0.01100 * 1.03 / 1.0225 = $ 0.01108 per yen