An investor invests in a Japanese bond at 5.5% for one year. The equivalent USA investment yields 3.8%. If the spot exchange rate is 110.00 yen per USD, what is the expected forward exchange rate in yen per USD?

Question

Quizplus · Accepted Answer

The correct answer is A because the expected forward exchange rate is 111.80 yen per USD. This is because the investor will receive a higher return on the Japanese bond than on the USA investment, so they will need to sell yen to buy dollars in order to invest in the Japanese bond. This will increase the demand for yen and decrease the demand for dollars, which will cause the yen to appreciate against the dollar.

An Investor Invests in a Japanese Bond at 5