The 1-year forward rate between the U.S. and Japan is ¥122.47 = $1. A 1-year risk-free security in Japan is yielding 5.3 percent while it is 4.6 percent in the U.S. Assume interest rate parity exists. What is the spot rate between the U.S. and Japan?

Question

Quizplus · Accepted Answer

According to interest rate parity:
(1 + 0.046) = (1 + 0.053)/(1 + forward rate)
1 + forward rate = (1 + 0.053)/(1 + 0.046) 
Forward rate = 1.0213 
Spot rate = forward rate / (1 + forward premium)
Spot rate = 1.0213 / (1 + 0.0213) = ¥121.66, which is the answer C.

The 1-Year Forward Rate Between the U