The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen's forward rate should exhibit a premium of about 2 percent.

Question

Quizplus · Accepted Answer

According to the interest rate parity theory, the forward rate of a currency should reflect the interest rate differential between two countries. In this case, since the US interest rates are higher than those in Japan, the forward rate for yen should exhibit a premium (higher than spot rate) of approximately 2 percent to compensate for the lower interest rate. Therefore, the statement is true.

The Interest Rate on Yen Is 7 Percent