Hey Chegg, I could use your help with this problem. We know that the yen and the

Question

Hey Chegg, I could use your help with this problem.

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 .1, 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.

Please show your work. It would help a lot.

Explanation / Answer

Forward rarte = Spot rate*(1+Domestic rate) / (1+Foreign rate)

80 = 100*(1+Rd) / (1+0.1)

Rd = 80*1.01/100 = 0.808 = 8.08%

b)

If Rd = 6%

Forward rarte = 100*(1+6%)/(1+10%) = 96.37 Yen / Franc

Which is not equal to 80,

difference = 96.37 - 80 = 16.37

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