Currently,a U.S.trader notes that in the 6-month forward market,the Japanese yen is selling at a premium (that is,you receive more dollars per yen in the forward market than you do in the spot market),while the British pound is selling at a discount.Which of the following statements is CORRECT?
A) If interest rate parity holds,6-month interest rates should be the same in the U.S. ,Britain,and Japan.
B) If interest rate parity holds among the three countries,the United States should have the highest 6-month interest rates and Japan should have the lowest rates.
C) If interest rate parity holds among the three countries,Britain should have the highest 6-month interest rates and Japan should have the lowest rates.
D) If interest rate parity holds among the three countries,Japan should have the highest 6-month interest rates and Britain should have the lowest rates.
E) If interest rate parity holds among the three countries,the United States should have the highest 6-month interest rates and Britain should have the lowest rates.

Question

Quizplus · Accepted Answer

As the yen is selling at a premium,this means that the interest rates in Japan are lower than in the U.S.Thus,when you invest in yen,you get part of your return from the interest rate and part when you convert back to dollars.The opposite is true of the rates in Britain.