Use the following information to answer this question:
$\bullet$Current 1-year Japanese interest rate 3.0%
$\bullet$Current 1-year Canadian interest rate 5.0%
$\bullet$Current spot rate C$0.01 per yen.
Estimate the 1-year forward exchange rate using interest rate parity.
A)C$0.0102 per yen
B)C$0.0098 per yen
C)C$1.0194 per yen
D)C$0.9810 per yen

Question

Quizplus · Accepted Answer

Interest rate parity (IRP) suggests that the difference in interest rates between two countries will equal the expected change in exchange rates between their currencies. The formula to estimate the 1-year forward exchange rate using IRP is: Forward Rate = Spot Rate * (1 + Interest Rate of Foreign Country) / (1 + Interest Rate of Domestic Country). Here, the foreign country is Japan (3.0%) and the domestic country is Canada (5.0%). Plugging in the values: Forward Rate = 0.01 * (1 + 0.03) / (1 + 0.05) = 0.0102. Therefore, the estimated 1-year forward exchange rate is C$0.0102 per yen.

Use the Following Information to Answer This Question ∙\bullet∙ Current 1-Year Japanese Interest Rate 3

Use the Following Information to Answer This Question $\bullet$ Current 1-Year Japanese Interest Rate 3