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

Question

Quizplus · Accepted Answer

The futures price can be calculated using the interest rate parity formula: F = S * (1 + r_domestic) / (1 + r_foreign). Substituting the given 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