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If the spot exchange rate is 101 yen/$, the one-year US interest rate is 0.049, and the one-year yen forward rate is 98.5 yen/$, what is the one-year yen interest rate?

Provide your answer in decimal form to three decimal places (e.g., 20.1% = .201).

Answer :

The one-year yen interest rate is 2.05%

The problem deals with cross-rate and arbitrage. In order to find the one-year yen interest rate, we need to use interest rate parity (IRP) condition.

IRP condition implies that if interest rate differentials between two countries are not equal to the forward rate discount/premium, then there would exist an arbitrage opportunity.

What is the one-year yen interest rate if spot yen is 101 yen/$; one year US interest rates are 0.049;

To use IRP, we need to find the expected return from investing in the US and Japan and equate them, such that:Expected return from US = Expected return from Japan

Therefore, the expected US return in one year from investing in US dollars is:

1 + US interest rate = 1 + 0.049= 1.049The expected yen return from investing in yen for one year is:

Spot yen rate * (1 + yen interest rate) / Forward yen rate = (101 * (1 + yen interest rate)) / 98.5

We do not know yen interest rate yet. Therefore, we set expected US return equal to expected yen return and solve for yen interest rate:1.049 = (101 * (1 + yen interest rate)) / 98.5

Solve for yen interest rate:

yen interest rate = ((1.049*98.5)/101) - 1= 0.0205, or 2.05% (rounded to 3 decimal places).

Therefore, the one-year yen interest rate is 2.05% (rounded to 3 decimal places).

Learn more about interest rate parity (IRP) from the given link:

https://brainly.com/question/29562485

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