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Answer: 0.0130 USD per JPY
Using IRP with a quote of **USD per JPY**: \[ F_0 = S_0 e^{(r_{USD}-r_{JPY})T} \] Given: - \(S_0 = 0.01250\) USD/JPY - \(r_{USD} = 2.0\%\) - \(r_{JPY} = 0\%\) - \(T = 2\) \[ F_0 = 0.01250 \times e^{(0.02-0)\times 2} = 0.01250 \times e^{0.04} \approx 0.01250 \times 1.0408 \approx 0.0130 \] So the 2-year forward exchange rate is **0.0130 USD per JPY**.
Author: Manit Arora
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Question-166.1. Assume the two-year risk-free interest rates in Japan and the United States are 0% and 2.0% per annum, respectively, with continuous compounding. The spot exchange rate between the Japanese yen (JPY) and the US dollar (USD) is 0.01250 USD per JPY (i.e., 80 JPY per $1 USD). What does interest rate parity (IRP) predict for the 2-year forward exchange rate?
A
0.0120 USD per JPY
B
0.0125 USD per JPY
C
0.0130 USD per JPY
D
0.0135 USD per JPY
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