Let R_US be the annual risk-free rate in the United States, R_J be the risk-free rate in Japan, F be the futures price of $/yen for a 1-year contract, and E the spot exchange rate of $/yen. Which one of the following is true?

Question

Quizplus · Accepted Answer

The futures price of $/yen for a 1-year contract is determined by the interest rate parity condition, which states that the expected return on a one-year investment in the United States should be equal to the expected return on a one-year investment in Japan. If the annual risk-free rate in the United States is greater than the risk-free rate in Japan, then the expected return on a one-year investment in the United States will be greater than the expected return on a one-year investment in Japan. This will lead to an increase in the demand for yen, which will cause the spot exchange rate of $/yen to decrease. As a result, the futures price of $/yen for a 1-year contract will be less than the spot exchange rate of $/yen.

Let RUS Be the Annual Risk-Free Rate in the United

Let R_US Be the Annual Risk-Free Rate in the United