A Japanese investor can earn a 1% annual interest rate in Japan or about 3.5% per year in the United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments?

Question

Quizplus · Accepted Answer

To be indifferent between the two investments, the investor would need to earn the same return in both countries. Since the interest rate in the U.S. is higher than in Japan, the investor would need to purchase dollars forward at a discounted rate to breakeven. The calculation would be (1.035/1.01) x (1/101) = ¥0.009856 or ¥98.56 per dollar. Therefore, the answer is B.

A Japanese Investor Can Earn a 1% Annual Interest Rate