Suppose the spot and three-month forward rates for the yen are ¥102.32 and ¥102.27, respectively. What is the approximate annual percent difference between the inflation rate in Japan and in the U.S.?

Question

Quizplus · Accepted Answer

The forward rate is slightly lower than the spot rate, indicating that the yen is expected to strengthen or the dollar is expected to weaken. The difference between the spot and forward rates is small, suggesting a small interest rate differential due to inflation differences. The formula to approximate the annual percentage difference in inflation is: [(Forward Rate - Spot Rate) / Spot Rate] * (12 / months) * 100. Plugging in the values: [(102.27 - 102.32) / 102.32] * (12 / 3) * 100 = -0.20 percent. This suggests a very slight expected higher inflation rate in the U.S. compared to Japan.

Suppose the Spot and Three-Month Forward Rates for the Yen