The annualized rate of interest on a three-month government bond in Japan is 8% and the rate on a similar instrument in the United States is 6%.The current spot rate is $0.0079/¥.Calculate the 3-month forward needed for interest rate parity to hold.

Question

Quizplus · Accepted Answer

To calculate the 3-month forward rate you need to use the interest rate parity formula and change the risk free interest rates into 3 month rates.The interest rate parity formula should look like this: (3-month forward/$0.0079/¥)= (1.015)/(1.02).This formula gives you a 3-month forward rate $0.00786/¥.

The Annualized Rate of Interest on a Three-Month Government Bond