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 would you expect the annual interest rate to be on Yen CDs?

Question

Quizplus · Accepted Answer

Using the interest rate parity formula: (1 + i_yen) = (1 + i_usd) * (Forward rate / Spot rate). Plugging in the values: (1 + i_yen) = (1 + 0.06) * (114.571 / 119.795). Solving for i_yen gives approximately 1.38%.

The Spot Yen/US$ Exchange Rate Is Yen119