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

Interest rate parity (IRP) formula is F = S * (1 + i_d) / (1 + i_f), where F is the forward rate, S is the spot rate, i_d is the domestic interest rate, and i_f is the foreign interest rate. Given S = $0.004300, i_d = 10% (0.10) for the U.S., and i_f = 7% (0.07) for Japan, and considering these are annual rates and the period is 90 days (1/4 of a year), the formula becomes F = 0.004300 * (1 + 0.10/4) / (1 + 0.07/4), which calculates to approximately 0.004332.

The 90-Day Interest Rates Annualized in the U