Suppose the Japanese yen spot exchange rate is 118 yen = $1.00.

Assume that U.S. six-month Treasury bills have an annualised rate of 6.2% while default-free Japanese bonds that mature in six months have an annualised rate of 5.0% and that interest rate parity holds. Find the six-month forward exchange rate in terms of dollars per yen.

1 Yen = .00468 dollars

Hint: First, convert annual rates to six-month rates e.g. (1 + r_h) = (1 + 0.062/2) and (1 + r_f) = (1 + 0.05/2). Then find the spot exchange rate in terms of dollars per yen; you can use the equation on p.599 to solve this question. Check figure: The spot rate in terms of $/Yen is $0.008475/Yen.

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