Hey Chegg, I seem to be lost with this question. I could really use your help.

1) We know that the Yen and the Swiss Franc have a 100 Yen / 1 Swiss Franc exchange rate, meaning one Swiss Franc buys 100 yen in the Spot ER market. The 1-year forward rate is 80 Yen / 1 Swiss Franc, or 1 Swiss Franc buys 80 Yen in the Forward market. If the Swiss Franc has an interest rate of .10, what should the Yen rate be for IPT (interest parity theory) to be attained? If the Yen rate were 6%, would there be equilibrium? If so, what would transpire? Show both amounts and differentials. Also, show everything in both Yen and Swiss Franc terms.

Below are 4 examples that my professor provided the class with in order to help us solve the problem above. However, the examples that were provided deal with US $ (domestic currency) and Euro (foreign currency) as oppose to Japanese Yen and Swiss Franc, which are both foreign currencies. That is what throws me off.

Examples:

IPT: I. Equilibrium & A. Amounts

Dollar Terms ($/E):

Given Information: i_$ = .08, i_E = .10, ^_$/ES = .606060606, ^$/EF = .595041322, & ^$P (Principle) = $10,000,000

Formula: ^$P (1 + i_$) = ^$P (1 / ^$/ES) (1 + i_E) (^$/EF)

$10,000,000 (1 + .08) = $10,000,000 (1 / .606060606) (1 + .10) (.595041322)

$10,800,000 = $10,800,000

Euro Terms (E/$):

Given Information: i_$ = .08, i_E = .10, ^_E/$S = 1.65, ^E/$F = 1.680555556, & ^$P (Principle) = $10,000,000

Formula: ^$P (1 + i_$) = ^$P (^E/$S) (1 + i_E) (1 / ^E/$F)

$10,000,000 (1 + .08) = $10,000,000 (1.65) (1 + .10) (1 / 1.680555556)

$10,800,000 = $10,800,000

IPT: I. Equilibrium & B. Differentials or Percentages

Dollar Terms ($/E):

Given Information: i_$ = .08, i_E = .10, ^_$/ES = .606060606, ^$/EF = .595041322

i_$ - i_E / 1 + i_E = ^$/EF - ^$/ES / ^$/ES

.08 - .10 / 1 + .10 = ^$/E.595041322 - ^$/E.606060606 / ^$/E.606060606

-.018181818 = -.018181818

Euro Terms (E/$):

Given Information: i_$ = .08, i_E = .10, ^E/$S = 1.65, ^E/$F = 1.680555556

i_$ - i_E / 1 + i_E = ^$/EF - ^$/ES / ^$/ES

.08 - .10 / 1 + .10 = ^E/$1.65 - ^E/$1.680555556 / ^$/E1.680555556

-.018181818 = -.018181818

With the examples that were provided above, this is how I approached the problem. I would really appreciate if you can tell me as to whether I am correct or not.

My answer:

I treated the Yen as the Dollar or domestic currency & the Swiss Franc as the Euro or foreign currency

Given Information: ^Yen/SFS = 100, ^Yen/SFF = 80, i_SF = .10, i_Yen = ?, Find i_Yen

Yen Terms (Yen/SF):

P^SF (1 + i_SF) = P^SF (^Yen/SFS) (1 + i_Yen) (1 / ^Yen/SFF)

(i_Yen - i_SF) / (1 + i_SF) = (^Yen/SFF ^Yen/SFS) / ^Yen/SFS

(i_Yen - .1) / (1 + .1) = (80 100) / 100

(i_Yen - .1) / 1.1 = -20 / 100

(i_Yen - .1) / 1.1 = -.2

(i_Yen - .1) = -.2 * 1.1

(i_Yen - .1) = -.22

i_Yen = -.22 + .1

i_Yen = -.12 or -12%

Swiss Franc Terms (SF/Yen):

P^SF (1 + i_SF) = P^SF (1 / ^SF/YenS) (1 + i_Yen) (^SF/YenF)

(i_Yen - i_SF) / (1 + i_SF) = (^SF/YenS ^SF/YenF) / ^SF/YenF

(i_Yen - .1) / (1 + .1) = (.01 .0125) / .0125

(i_Yen - .1) / 1.1 = -.0025 / .0125

(i_Yen - .1) / 1.1 = -.2

(i_Yen - .1) = -.2 * 1.1

(i_Yen - .1) = -.22

i_Yen = -.22 + .1

i_Yen = -.12 or -12%

For the Interest Rate Parity Theory (IPT) to be attained, the yen rate should be -12%.

If the the yen rate were 6%, showing IPT in differentials or percentages:

Yen Terms (Yen/SF)

i_Yen i_SF / 1 + i_SF = ^Yen/SFF ^Yen/SFS / ^Yen/SFS

.06 - .1 / 1 + .1 = 80 100 / 100

-.04 / 1.1 = -20 / 100

-.03636364 -.2

This is not equilibrium

Swiss Franc Terms (SF/Yen)

I_Yen i_SF / 1 + i_SF = ^SF/YenS ^SF/YenF / ^SF/YenF

.06 - .1 / 1 + .1 = .01 .0125 / .0125

-.04 / 1.1 = -.0025 / .0125

-.03636364 -.2

This is not equilibrium

If the yen rate were 6%, showing IPT in amounts

Yen Terms (Yen/SF):

^$P (1 + i_$) = ^$P (1 / ^$/ES) (1 + i_E) (^$/EF)

(1 + .06) = (1 / 100) (1 + .1) (80)

1.06 = .88, This is not an equilibrium

Swiss Franc Terms (SF/Yen):

Formula: ^$P (1 + i_$) = ^$P (^E/$S) (1 + i_E) (1 / ^E/$F)

(1 + .06) = (.01) (1 + .1) (1 / .0125)

1.06 = .88, this is not an equilibrium

I apologize in advance for lengthening the question with examples. However, I can't seem to figure out this problem since the question asks to show both amounts and differentials and to show everything in Yen and Swiss Francs. That is what throws me off. Compared to the examples that my professor has shown, please let me know if my answers are correct. If not, please provide me with the correct answer and show your work step by step so I can understand what I did wrong. Thank you.