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The nominal yield on 6-month T-bills is 8%, while default-free Japanese bonds that mature in 6...

The nominal yield on 6-month T-bills is 8%, 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 $0.011. If interest rate parity holds, what is the 6-month forward exchange rate? Do not round intermediate calculations. Round your answer to five decimal places.

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Expert Solution

Fwd rate :

Acc to IRPT,

Fwd rate = Spot rate * [ (1+Hi) / ( 1 + Fi) ]

Hi = Int rate in US
Fi = Int rate Japan

Particulars Amount
Spot Rate $ 0.0110
Hi for period 4.000%
Fi for period 2.250%
Home Country US
Foreign Country Japan
Forward rate for ( In Years) 0.5

According to Int Rate parity Theorm,
Fwd rate After 0.5 Years = Spot rate * ( 1 + Hi ) / ( 1 + Fi )
= $ 0.011 * ( 1 + 0.04) / ( 1 + 0.0225 )
= $ 0.011 * ( 1.04) / ( 1.0225 )
= $ 0.011 * ( 1.01711 )
= $ 0.01119
Forward rate after 6 Months is  $ 0.01119

jeff jeffy answered 2 years ago
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