If the spot exchange rate is 110 yen per U.S.dollar,the "fair" forward exchange rate is 115 yen per U.S.dollar,and the risk-free borrowing rate in the United States is 2.5%,what must the risk-free borrowing rate be in Japan?

Question

Quizplus · Accepted Answer

The forward exchange rate can be calculated using the interest rate parity formula: Forward Rate = Spot Rate * (1 + interest rate of domestic currency) / (1 + interest rate of foreign currency). Solving for the Japanese interest rate, we get: 115 = 110 * (1 + 0.025) / (1 + r). Solving for r gives approximately 7.2%.

If the Spot Exchange Rate Is 110 Yen Per U