Use Figure 21.1 to answer the following questions. Suppose interest rate parity

Question

Use Figure 21.1 to answer the following questions.

  

Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 3.0 percent. The six-month risk-free rate in Great Britain, Japan, and Switzerland must be percent, percent, and percent, respectively. (Round your answers to 2 decimal places. (e.g., 32.16))

Use Figure 21.1 to answer the following questions.

Use Figure 21.1 to answer the following questions. Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 3.0 percent. The six-month risk-free rate in Great Britain, Japan, and Switzerland must be percent, percent, and percent, respectively. (Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Use this formula :

Forward rate 6 months currency concerned/$

= (1+r of concerned country)/(1+ r of US) * spot rate currency concerned/$

a)

r is 6-month rate in Great Bitan and r 6-month in US is = 3% = 0.03

So, (1+r)/(1+0.03) *0.6316 = 0.6305

=> r = 0.0282 = 2.82% (ANSWER)

b)

r is 6-month rate in Japan and r 6-month in US is = 3% = 0.03

So, (1+r)/(1+0.03) *81.97 = 82.13

=> r = 0.0320 = 3.2% (ANSWER)

c)

r is 6-month rate in Switzerland and r 6-month in US is = 3% = 0.03

So, (1+r)/(1+0.03) *0.9402= 0.9419

=> r = 0.0319 = 3.19% (ANSWER)

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