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

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

INTEREST RATE PARITY Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.009144, while in the 90-day forward market 1 Japanese yen =$.009184. 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 yield of 90 days risk free securities in the Country U.

Introduction:

Interest rate parity 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.

Explanation

Given information:

The one Country J yen in spot market is $0.009144. The forward rate of one Country J yen is$0.009184

The yield of 90 days risk free securities is 2% or 0.02.

Equation of interest rate parity:

Forward exchange rateSpot exchange rate=(1+rh)(1+rf)

Where,

• rh is yield in Country U dollars.
• rf is yield in Country J yen.

rf is (0.02×90360)

Compute the yield:

Forward exchange rateSpot exchange rate=(1+rh)(1+rf)$0.009184$0.009144=(1+rh)(1+(0

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