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Fundamentals of Financial Manageme...
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Fundamentals of Financial Manageme...
INTEREST RATE PARITY Six-month T-bills have a nominal rate of 2%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 1.25%. in the spot exchange market, 1 yen equals $0.0081. If interest rate parity holds, what is the 6-month forward exchange rate?
To determine: The 6-month forward exchange rate.
Introduction:
Interest Rate Parity:
It refers to that theory which indicates the difference of interest rates provided by two different countries to be the same as the difference of forward exchange rate and spot exchange rate.
Given information:
The nominal rate of six-month t-bills is 2% or 0.02.
The nominal rate of six-month bonds is 1.25% or 0.0125.
On the basis of spot exchange rate, 1 yen is equal to $0.0081.
Equation of interest rate parity,
Where,
Substitute $0.0081 for spot exchange rate, 0.01 for
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