Question

If you are a Japanese producer who sells products in the US, you want a foreign exchange future without going through the futures market. So, you borrow money in dollars with an interest rate of 5% and immediately convert it to yen at a rate of 1 dollar to 100 yen. Then you put the money in a Japanese interest-bearing account with an interest rate of 10%. What is the forward exchange rate in this case?

Answer 1

Answer:

104.76 yen to dollars

Explanation:

[spot exchange rate ¥:$]×(1+[interest rate ¥])/(1+[interest rate $]), so plugging in the numbers, we have 100×(1+0.10)/(1+0.05) = 100×1.10/1.05 = 104.76 yen to dollars.