The 90 day interest rates (annualized) in the U.S. and Japan are, respectively, 10% and 7%, while the direct spot quote for the yen in New York is $.004300. At what 90 day forward rate would interest rate parity hold?

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward exchange rate should equal the spot exchange rate adjusted for the interest rate differential between the two currencies. Using the formula:

Forward rate = Spot rate x (1 + domestic interest rate) / (1 + foreign interest rate)

We can plug in the given values to find the forward rate:

Forward rate = .004300 x (1 + 0.10/4) / (1 + 0.07/4) = .004332

Therefore, the best choice is C) .004332.

The 90 Day Interest Rates (Annualized) in the U