Assessing Whether IRP Exists Assume zero transaction costs. As of now, the Japanese one year interest rate is 3 percent, and the U.S. one-year interest rate is 9 percent. The spot rate of the Japanese yen is $0.0090 and the one-year forward rate of the Japanese yen is $0.0097. Determine whether interest rate parity exists, or whether the quoted forward rate is too high or too low. Based on the results of part (a), is covered interest arbitrage feasible for U.S. investors, for Japanese investors, for both types of investors, or for neither type of investor?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 7, Problem 43QA
Textbook Problem

Assessing Whether IRP Exists Assume zero transaction costs. As of now, the Japanese one year interest rate is 3 percent, and the U.S. one-year interest rate is 9 percent. The spot rate of the Japanese yen is $0.0090 and the one-year forward rate of the Japanese yen is $0.0097.

  1. Determine whether interest rate parity exists, or whether the quoted forward rate is too high or too low.
  2. Based on the results of part (a), is covered interest arbitrage feasible for U.S. investors, for Japanese investors, for both types of investors, or for neither type of investor?

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