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Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
INTEREST RATE PARITY Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.008055, while in the 90-day forward market 1 Japanese yen $0 008065. In Japan, 90-day risk-free securities yield 2%. What is the yield on 90-day risk-free securities in the United States?
To determine: The yield of 90 days risk free securities in the United States.
Introduction:
Interest Rate Parity:
It refers to that theory which indicates the difference of interest rates provided by two different countries is to be same as the difference of two types of the exchange rate, which are forward exchange rate and spot exchange rate.
Given information:
The one Japanese yen in spot market is $0.008055.
The forward rate of one Japanese yen is $0.008065
The yield of 90 days risk free securities is 2% or 0.02.
Equation of interest rate parity,
Where,
Substitute $0.008065 for forward rate, $0.008055 for spot exchange rate,
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