   Chapter 19, Problem 3P 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 Six-month T-bills have a nominal rate of 4%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 2 5%. In the spot exchange market, 1 yen equals $0 0098. If interest rate parity holds, what is the 6-month forward exchange rate? Summary Introduction To identify: The six month forward exchange rate. Introduction: Foreign Exchange Rate: Foreign exchange rate refers to the rate required to obtain a currency in other country’s currency. Interest Rate Parity: Interest rate parity states that the variations in the interest rates of 2 countries is equilavent to the difference in the spot and future exchange rates between those two countries. Explanation Computation of six month forward exchange rate: Given, Spot rate is 0.0098$ per yen.

Annual interest rate in dollars is 4% (2% for 6 month period).

Annual interest rate in yen is 2.50% (1.25% for 6 month period).

Forwardrate=Spotrate×(1+Interestrateinhomecurrency)(1+Interestratein

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