Suppose that at some point the spot exchange rate is equal to 100 yen per one U.S.dollar,while the interest rate in dollars is 6% and the interest rate in yen is 1%.What is the approximate forward rate that is consistent with this situation?
A)95.3 yen per dollar
B)105 yen per dollar
C)107 yen per dollar
D)92 yen per dollar

Question

Quizplus · Accepted Answer

To calculate the forward rate, we can use the following formula:

Forward rate = (Spot rate * (1 + foreign interest rate) / (1 + domestic interest rate))

Substituting the given values, we get:

Forward rate = (100 * (1 + 0.01) / (1 + 0.06)) = 95.34 yen per dollar

Rounding off to one decimal place, the approximate forward rate is 95.3 yen per dollar. Hence, the best choice is A) 95.3 yen per dollar.

Suppose That at Some Point the Spot Exchange Rate Is