Suppose that the risk-free rates in the United States and in Japan are 5.25% and 4.5%,respectively.The spot exchange rate between the dollar and the yen is $0.008828/yen.What should the futures price of the yen for a one-year contract be to prevent arbitrage opportunities,ignoring transactions costs?
A)$0.009999/yen
B)$0.009981/yen
C)$0.008981/yen
D)$0.008891/yen
E)none of the above

Question

Quizplus · Accepted Answer

The futures price can be calculated using the interest rate parity formula: F = S * (1 + r_d) / (1 + r_f), where S is the spot rate, r_d is the domestic interest rate, and r_f is the foreign interest rate. Plugging in the values: F = 0.008828 * (1 + 0.0525) / (1 + 0.045) = 0.008891/yen.

Suppose That the Risk-Free Rates in the United States and in Japan