Explanation:
Since we have assumed that the covered interest rate parity holds, then the forward rate parity holds. That is, a one-year spot rate should be equal to the one-year forward rate. That is,
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Q.27 Consider the following information:
| Currency | Libor (annualized) | Currency Combinations | Spot Rate |
|---|---|---|---|
| USD | 0.30% | USD/EUR | 1.6975 |
| EUR | 5.00% | JPY/EUR | 0.0085 |
| JPY | 0.30% | JPY/USD | 82.25 |
If the covered interest rate parity holds, what is the forward rate of JPY/EUR currency for one year?
A
0.0045
B
0.0089
C
0.0056
D
0.0065
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