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The nominal yield on 6-month T-bills is 4%, while default-free Japanese bonds that mature in 6...

The nominal yield on 6-month T-bills is 4%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 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.

Solutions

Expert Solution

If Interest Rate Parity holds then,

F/S=(1+ia)T/(1+ib)T

Where F= Forward exchange rate

S= Spot exchange rate (i.e.$0.011/yen here)

ia= interest rate of $ (i.e. 4% or .04)

ib= interest rate of Yen (i.e. 5% or .05)

Therefore,

F/0.011 = (1+.04)1/2/(1+.05)1/2

F/0.011= 1.01980/1.02470

F/0.011= 0.99523

F = 0.99523*0.011

F = 0.01095

The 6 month forward exchange rate is $0.01095/yen.

jeff jeffy answered 2 years ago
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