Suppose the interest rate in Japan is 1% p. a. and the interest rate in the US
Question:
Suppose the interest rate in Japan is 1% p. a. and the interest rate in the US is 4.0% p. a.
Assume borrowing and investing can occur at these rates.
The spot rate is ¥120 per dollar. What is the one year ahead forward rate (stated as yen per dollar) that will imply zero arbitrage profit opportunities?
Note that the formulas work with exchange rates quoted in direct terms.
2.
The interest rate in the US is 2% p. a. and the interest rate in UK is 5% p.a.
If the spot exchange rate is $1.20 per pound what is the one year ahead forward that will imply zero arbitrage profit opportunities?
3.
The one year forward premium for euro against the dollar is 2%. If the interest rate in the euro zone is 2.5% what should be the interest rate in the US?
Report the answer without the % sign.
Expert Answer:
SOLUTION 1 To find the one year ahead forward rate that will imply zero arbitrage profit opportuniti... View the full answer
