Question

Use the information below to answer the following questions. Currency per U.S. $ 1.2384 Australia dollar 6-months forward Japan Yen 6-months forward 1.2349 100.4000 99.9800 6792 U.K. Pound 6-months forward .6781 Suppose interest rate parity holds, and the current risk-free rate in the United States is 4 percent per six months. Use the approximate interest rate parity equation to answer the following questions Requirement 1: What must the six-month risk-free rate be in Australia? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 3.42 % Risk-free rate Requirement 2: What must the six-month risk-free rate be in Japan? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate 3.15 Requirement 3: What must the six-month risk-free rate be in Great Britain? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) 3.67 % Risk-free rate

Answer 1

1 future expected cted sate 1 & spot rate ( 14 PUNCA itp.incs pirs periodic anflation rate. the If 1.2349 = 1.2384 ( + 4) 1+0.04 it f = 1. 2349 X 1.04 1.2384 it of -1.0371 8f. = 3.7%. = 3.71%. 99.9800 = 100.40 (Art) Ho.04 Iarf = 99.98 x 1.04 100.40 rf = 1.0357-1 xf 3.57%

0.6781 = 0.6792. (It re). 2 170.0u tr = 0.6781 x 1.04 0.6792 84 = 1.0388- ) 1982 H00 re - 3.887, torx Pi

1) the 6 months risk free rate in Australia is 3.71%

2) the 6 months risk free rate in Japan is 3.57%

3) the 6 months risk free rate in Great britan is 3.88%