The Spot rate for USD to JPY is $1 to Y107.
The riskless rate of return for 6 months for investing in USD is 2%.
The riskless rate of return for 6 months for investing in JPY is 0.9%.
What is the 6 month Forward Rate of USD to JPY (number of JPY to be received for the payment of $1 6 months from today)?
To calculate the 6 month forward rate of USD to JPY, we can use the interest rate parity formula:
Forward Rate = Spot Rate * (1 + Domestic Interest Rate) / (1 + Foreign Interest Rate)
In this case, the domestic currency is USD and the foreign currency is JPY.
Forward Rate = $1 * (1 + 0.02) / (1 + 0.009)
Forward Rate = $1 * 1.02 / 1.009
Forward Rate = $1.010089636
Therefore, the 6 month forward rate of USD to JPY is approximately $1.0101.
To calculate the 6-month forward rate of USD to JPY, we need to consider the interest rate differentials between the two currencies.
First, let's calculate the USD interest rate for 6 months:
USD interest rate = 2% / 2 = 1% (since the riskless rate of return is given for 6 months)
Next, let's calculate the JPY interest rate for 6 months:
JPY interest rate = 0.9% / 2 = 0.45% (since the riskless rate of return is given for 6 months)
Now, let's calculate the forward exchange rate using the interest rate parity formula:
Forward rate = Spot rate * ((1 + domestic interest rate) / (1 + foreign interest rate))
Forward rate = $1 * ((1 + 0.01) / (1 + 0.0045))
Forward rate = $1 * (1.01 / 1.0045)
Forward rate = $1 * 1.0055
So, the 6-month forward rate of USD to JPY is approximately $1 to Yen 1.0055.