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# Interest rate parity with Japan for forward exchange rate

Interest rate parity: Six-month T-bills have a nominal rate of 7 percent, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5 percent. In the spot exchange market, 1 yen equals \$0.009. If interest rate parity holds, what is the 6-month forward exchange rate?

Exchange rates below lists foreign exchange rates for July 25, 2005. On that day, how many dollars would be required to purchase 1,000 units of each of the following: British pounds, Canadian dollars, EMU euros, Japanese yen, Mexican pesos, and Swedish kronas?

Exchange rates

Direct Quotation: Indirect Quotation:
US Dollars Required to Buy - # of Units of Foreign One Unit of Foreign Currency Currency per U. S. Dollar
( 1) ( 2)
Brazilian real \$ 0.4025 2.4845
British pound 1.7471 0.5724
Denmark krone 0.1618 6.1805
Euro 1.2069 0.8286
Hungarian forint 0.004918 203.33
Israeli shekel 0.2207 4.5310
Japanese yen 0.008974 111.43
Mexican peso 0.0931 10.7400
South African rand 0.1507 6.6357
Swedish krona 0.1281 7.8064
Swiss franc 0.7725 1.2945
Venezuelan bolivar 0.000466 2145.92

#### Solution Preview

Forward rate = (1+dollar rate)/(1+yen rate) X spot rate
The six month \$ rate is 7%/2=3.5% and six month yen rate = 5.5%/2 = 2.75%
Six month forward rate = (1+3.5%)/(1+2.75%) X 0.009 ...

#### Solution Summary

The solution explains how to calculate the amount of dollars needed to purchase various currencies

\$2.19