Question

the nominal yield on 6-month t-bills is 7%, while default-free japanese bonds that mature in 6 months have a nominal rate of 5.5%. in the spot exchange market, 1 yen equals $0.009. if interest rate parity holds, what is the 6-month forward exchange rate?

Answer 1

The 6 - month forward exchange rate, given the nominal rate, and the spot exchange, will be 0.907 %

How to find the forward rate ?

First, find the periodic nominal rate as the period is in months :

= Nominal rate / Number of periods per year

= 5 . 5 % / 2 periods per year

= 2 . 75%

The nominal yield on  - Bills :

= 7 % / 2

=  3.5%

The forward exchange rate is:

= ( 1 + periodic nominal rate ) / ( 1 + nominal yield ) x Current spot exchange

= ( 1 + 0.035) / ( 1 + 0.0275) x 0.0009

= 0.00907

= 0.907 %

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