. We know that the yen and the Swiss franc have a 100yen/ sf 1 exchange rate, me
ID: 2718221 • Letter: #
Question
. We know that the yen and the Swiss franc have a 100yen/ sf 1 exchange rate, meaning one Swiss franc buys 100 yen in the spot ER market. The 1 year forward rate is 80 yen /Swiss franc , or 1 franc buys 80 yen in the forward market. If the Swiss franc has an interest rate of .02, what should the yen rate be for IPT (interest parity theory) to be attained? If the yen rate were 6%, would there be equilibrium? If so, what would transpire? Show both amounts and differentials. Also, show everything in both yen and franc terms. (25 points)
Explanation / Answer
1 sf = 100 yen
1000 sf = 100,000 yen
Interest @ 2% on 1000 sf = 100,000 * 2% =2,000 yen
1 year forward rate
1 sf = 80 yen
1000 sf = 80,000 yen
Interest @ 6% on 1000 sf = 80,000 * 6% =4,800 yen
There is no equilibrium.
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