In Japan, 90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return. In Canada, 90-day securities have a 4% annualized return and 180-day securities have an annualized return of 4.5%. All securities are of equal risk, and Japanese securities are denominated in terms of the Japanese yen. Assuming that interest rate parity holds in all markets, which of the following statements best describes the exchange rate?

Question

Quizplus · Accepted Answer

Interest rate parity implies that the forward exchange rate should be equal to the spot exchange rate adjusted for the difference in interest rates. In this case, the 90-day forward exchange rate should be equal to the spot exchange rate multiplied by (1 + 0.04) / (1 + 0.04) = 1.

In Japan, 90-Day Securities Have a 4% Annualized Return and 180-Day