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Forward exchange rate under interest rate parity

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Reference no: EM132235028

Suppose U.S. dollar interest rate is 6% for one-year investment and the equivalent Japanese yen investment is 1%. The market expects that the spot exchange rate between the dollar and the yen will stay unchanged for the next year. Which of the following would constitute a "carry trade"?

a. Borrow U.S. dollar, convert to Japanese yen, and invest in yen for one year.

b. Borrow Japanese yen, convert to U.S. dollar, and invest in dollar for one year.

c. Borrow U.S. dollar, convert to Japanese yen, and invest in dollar for one year.

d. Borrow Japanese yen, convert to U.S. dollar, and invest in yen for one year.

If the dollar interest rate is 5% (for one year investment), the equivalent SF interest rate is 8%, and spot exchange rate is $1.10/SF, what is the one-year forward exchange rate under interest rate parity?

(Keep four decimals)

Reference no: EM132235028

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