The nominal yield on 6-month T-bills is 6%, while default-free Japanese bonds that mature in 6...

The nominal yield on 6-month T-bills is 6%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 4.5%. In the spot exchange market, 1 yen equals $0.005. If interest rate parity holds, what is the 6-month forward exchange rate? Round the answer to five decimal places. Do not round intermediate calculations.

Answer: $ _________

Solutions

Expert Solution

Solution:-

Term = 6 months

Risk free rate in US = 6%

Risk free rate in japan = 4.5%

Spot rate 1 yen = $0.005

Forward rate = spot rate * (1+interest in domestic country) / (1+interest in foreign country)

= $0.005 * [1+6% * (6m/12m) / 1+ 4.5%(6m/12m)]

= $0.005 * 1.03 / 1.0225

= 0.005 * 1.00733

= $0.005036

Therefore the forward rate is $0.005036

jeff jeffy answered 1 year ago

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