   Chapter 19, Problem 10P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

INTEREST RATE PARITY Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.00982,while in the 90-day forward market 1 Japanese yen =$0 00983. In Japan, 90-day risk-free securities yield 2%.What is the yield on 90-day risk-free securities in the United States?

Summary Introduction

To determine: The percentage of the risk free securities in Country U.

Introduction:

Interest rate parity: Interest rate parity is the theory which is used to show the relationship between the future rate and the spot rate of the two country currency.

Explanation

Determine the percentage of the risk free securities in Country U

Given,

Forward price is $0.00983. Spot price is$0.00982.

Risk free security is 2% or 0.50% (2%/4).

Formula to calculate the percentage of risk free security in united state:

ForwardRateSpotExchangeRate=1+ExchangeRate1+RiskfreeRate

$0.00983$0.00982=1+ExchangeRate1+0

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