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12 March, 12:50

A Japanese investor can earn a 1 percent annual interest rate in Japan or about 3.5 percent per year in the United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor be indifferent between the U. S. and Japanese investment

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  1. 12 March, 13:05
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    =Y = 98.56 / $1

    Explanation:

    A Japanese investor can earn a 1 percent annual interest rate in Japan or about 3.5 percent per year in the United States.

    If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor be indifferent between the U. S. and Japanese investment.

    1 + interest rate in US = Spot rate x (1 + interest rate in Japan)

    Therefore (1 + 3.5%) = ($1 / 101 yen) x (1 + 1%) (x)

    1.035 = 0.0099 x 1.01 (x)

    Therefore x = 103.5

    103.5 / 101 = 1.02475

    1.02475 x spot rate = 98.56
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