In Japan,90-day securities have a 4% annualized return and 180-day securities have a 5% annualized return.In Canada,90-day securities have a 4% annualized return and 180-day securities have a 4.5% annualized return.All securities are of equal risk,and Japanese securities are denominated in terms of the Japanese yen.Assuming that interest rate parity holds in all markets,which statement about the exchange rate is true?

Question

Quizplus · Accepted Answer

Interest rate parity implies that the forward exchange rate equals the spot exchange rate multiplied by the ratio of the domestic and foreign interest rates. In this case, the 90-day forward exchange rate is equal to the spot exchange rate multiplied by 1 + 0.04 / 1 + 0.04 = 1.0000. The 180-day forward exchange rate is equal to the spot exchange rate multiplied by 1 + 0.05 / 1 + 0.045 = 1.0000. Therefore, the yen-dollar spot exchange rate equals the yen-dollar exchange rate in both the 90-day and 180-day forward markets.

In Japan,90-Day Securities Have a 4% Annualized Return and 180-Day