You can buy or sell the yen spot at ¥102 to the dollar. You can buy or sell the yen one-year forward at ¥104 to the dollar. If U.S. annual interest rates are 4%, what must be the approximate one-year Japanese interest rate if interest rate parity holds?

Question

Quizplus · Accepted Answer

Interest rate parity implies that the difference in interest rates between two countries should equal the difference between the forward and spot exchange rates. Using the formula for interest rate parity, the Japanese interest rate is approximately 5.92%.

You Can Buy or Sell the Yen Spot at ¥102