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Calculating the forward rate between two currencies

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The Current Exchange Rate between Japan and U.K. is One British Pound Equals 150 Japanese Yen. The one year Annual Interest Rate in Japan is 1%, while the Annual Interest Rate in U.K. is 4%.

Given this, what would you expect the Forward Rate to be between Japanese Yen and British Pounds, one year from now?

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Solution Summary

Solution describes the steps to calculate the forward rate between the two given currencies, one year from now.

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Spot rate of one British Pound=150 Japanese Yen
Annual Interest rate in Japan=1%
Annual Interest rate in UK=4%

Forward Rate = Spot Rate*(1 + Interest Rate of Japan)/(1 + Interest Rate of UK)

Solution provided by:
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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