The one year interest rate in the United States is 2%.The spot exchange rate for yen is 113.25 to the dollar.The six months forward rate is 112.96 to the dollar.These prices indicate that the six-month risk-free rate in Japan is [blank].

Question

Quizplus · Accepted Answer

To calculate the six-month risk-free rate in Japan, we can use the interest rate parity formula:

(1 + US interest rate) x (forward exchange rate / spot exchange rate) = 1 + Japan interest rate

Plugging in the given values:

(1 + 0.02) x (112.96 / 113.25) = 1 + Japan interest rate

Simplifying:

1.02 x 0.99745 = 1 + Japan interest rate

Japan interest rate = 1.0226 or 2.26%

Therefore, the answer is B) 2.26%.

The One Year Interest Rate in the United States Is