Question

The spot rate of Japanese Yen is 105 Yen per dollar. After one year spot rate will be is 115 Yen per dollar. If you deposit 1000000 yen in one year saving account with 5% interest rate what will be the dollar rate of return on deposit. Is there a interest parity between Yen and dollar deposit?

Answer 1

Current Spot rate of Japanese Yen to Dollar = 105

In one year, the spot rate will be = 115

Now, if we keep 1000000 yen in deposit at 5% interest = 1000000 + (5% of 1000000)

                                                                                                   = 1000000 + 50,000

                                                                                                   = 1,050,000 Yen

Now, in one-year spot rate is 115 per dollar.

Therefore, the return in Dollar would be = 1,050,000/115

                                                                          = $ 9140.43

However, if the conversion was done earlier and then Dollar was invested in a one year period at 5%:

                   Therefore, conversion =   1000000/100 = $ 10,000

            Now, if $10,000 was invested for one year at 5% = $10,000 + (5% of $10,000)

                                                                                                    = $10,000 + 500

                                                                                                    = $10,500

               Therefore, there is a difference of interest parity between Yen and the Dollar if the conversions are done before or after the one year period.