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

Question

Gerald Dickerson

Business

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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Answers (1)

Know the Answer?

Noel Bright · Answer 1

=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