In May 2018, a Japanese investor is thinking about investing in bank deposits in Japan and...

In May 2018, a Japanese investor is thinking about investing in bank deposits in Japan and Mexico. The annual interest rate on Japanese deposits is 4%, versus 3.5% on deposits in Mexico. Assume that that the forward rate in May 2018 is equal to F¥/$ = 110.7 yens per peso= expected exchange rate in May 2019 [that is to say, the investor can buy a contract that guaranty him an exchange rate of 110.7 yens per peso in May 2020]. The spot exchange rate in May 2019 is E¥/$ = 110 yens per peso. Does covered interest parity hold in this example? Justify your answer (use at least 4 decimal places in your calculations)

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Rahul Sunny answered 2 years ago

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