The spot Yen/$US exchange rate is Yen119.795/$US,and the one-year forward rate is Yen114.571/$US.If the annual interest rate on dollar CDs is 6%,what annual interest rate would you expect on Yen CDs?

Question

Quizplus · Accepted Answer

The correct answer is A because the interest rate parity condition states that the forward premium or discount should be equal to the difference in interest rates between the two currencies. In this case, the forward premium is (119.795 - 114.571) / 114.571 = 0.0453, which implies an annual interest rate on Yen CDs of 6% + 0.0453 * 100 = 10.38%.

The Spot Yen/$US Exchange Rate Is Yen119