Suppose the exchange rate for Japanese yen, S0, is currently 120 = $1. If the interest rate
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Suppose the exchange rate for Japanese yen, S0, is currently ¥120 = $1. If the interest rate in the United States is R US = 10 percent and the interest rate in Japan is R J = 5 percent, then what must the forward rate be to prevent covered interest arbitrage? From IRP, we have:![F Sox [1 + (RJ - Rus)] 120 x [1 + (.05.10)] 120 x .95 114](https://dsd5zvtm8ll6.cloudfront.net/images/question_images/1700/5/6/9/787655ca2bbba4901700569786644.jpg)
Notice that the yen will sell at a premium relative to the dollar. (Why?)
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The yen will sell at a premium relative to the dollar because of covered interest arbitrage Covered interest arbitrage is a strategy that exploits the ...View the full answer
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Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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