Assume the spot rate for the Japanese yen currently is ¥102.32 per $1 and the one-year forward rate is ¥102.69 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?

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Interest rate parity implies that the expected return on a one-year investment in the U.S. should be equal to the expected return on a one-year investment in Japan. The expected return on a one-year investment in Japan is 2.5 percent. The expected return on a one-year investment in the U.S. is equal to the spot rate multiplied by the forward rate and divided by the spot rate minus one. Substituting the given values, we get:(102.69/102.32 - 1) * 100 = 2.14%

Assume the Spot Rate for the Japanese Yen Currently Is