Assume the spot rate for the Japanese yen currently is ¥106.83 per dollar while the one-year forward rate is ¥107.20. Also assume a risk-free asset in Japan is currently earning 4.6 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?
A) 4.24 percent
B) 5.08 percent
C) 4.62 percent
D) 4.78 percent
E) 4.96 percent
A) 4.24 percent
Explanation: (¥107.20/¥106.83) = [1.046/(1 + RUS)]
RUS = .0424, or 4.24%
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