Interest rate parity tells us that the cost of buying yen forward is exactly the same as the cost of borrowing dollars,buying yen in the spot market,and leaving them on yen deposit.

Question

Quizplus · Accepted Answer

According to interest rate parity, the cost of buying yen forward should be equal to the cost of borrowing dollars, converting the borrowed dollars to yen in the spot market, and then investing those yen in a yen deposit. This is because interest rate parity assumes that there should be no arbitrage opportunities between different currency markets, and that any differences in interest rates between currencies should be offset by the forward exchange rate. Therefore, A is the correct answer.

Interest Rate Parity Tells Us That the Cost of Buying