Determine whether interest parity rate exists

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Assume zero transaction costs. As of now, the Japanese one-year interest rate is 3%, and the US one-year interest rate is 9%. The spot rate of the Japanese yen is $.0090 and the one-year forward rate of Japanese yen is $.0097.

A) Determine whether interest parity rate exists, or whether the quoted forward rate is quoted too high or too low.

B) Based on the information provided in (A), is covered interest arbitrage feasible for US investors, for Japanese investors, for both types or for neither types of investors

 

Reference no: EM13710125

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