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?

Question

Quizplus · Accepted Answer

The correct answer is A because the interest rate parity formula is:F = S * (1 + r_f) / (1 + r_d)where:F is the forward rateS is the spot rater_f is the foreign risk-free rater_d is the domestic risk-free rateSolving for r_d, we get:r_d = (F - S) / S * (1 + r_f)Plugging in the given values, we get:r_d = (105 - 106) / 106 * (1 + 0.05) = 0.0600 = 6.00%

The Spot Rate for the Japanese Yen Currently Is ¥106