5. (10 pts) Suppose that the dollar-yen spot exchange rate is $0.0090/% and the 90-day forward...

 

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5. (10 pts) Suppose that the dollar-yen spot exchange rate is $0.0090/% and the 90-day forward exchange rate is $0.0091/%. The annual interest rate on US bonds is 6%. a. Assuming that covered interest parity holds, calculate the Japanese annual interest rate on bonds of equivalent risk. b. Suppose now that the annual interest rate on US bonds rose to 8%. Assuming that the Japanese interest rate and the spot exchange rate remain constant, calculate what the forward rate would have to change to in order to reestablish covered interest parity. 5. (10 pts) Suppose that the dollar-yen spot exchange rate is $0.0090/% and the 90-day forward exchange rate is $0.0091/%. The annual interest rate on US bonds is 6%. a. Assuming that covered interest parity holds, calculate the Japanese annual interest rate on bonds of equivalent risk. b. Suppose now that the annual interest rate on US bonds rose to 8%. Assuming that the Japanese interest rate and the spot exchange rate remain constant, calculate what the forward rate would have to change to in order to reestablish covered interest parity.

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Covered Interest Parity Calculations a Japanese Interest Rate Assuming covered interest parity CIP h... View the full answer