P21-6 Interest Rate Parity [LO2]

Use the information below to answer the following questions.

	Currency per U.S. $
U.K. Pound	0.5135
6-months forward ()	0.5204
Japan Yen	108.21
6-months forward ()	106.96
Switzerland Franc	1.0492
6-months forward (SF)	1.0478

Suppose interest rate parity holds, and the current six-month risk-free rate in the United States is 2.5 percent.

1. What must the six-month risk-free rate be in Great Britain?

a. 3.84%

b. 3.93%

c. 1.17%

d. 5.00%

e. 3.69%

2. What must the six-month risk-free rate be in Japan?

a. 1.34%

b. 1.32%

c. 3.66%

d. 1.42%

e. (1.39)%

3. What must the six-month risk-free rate be in Switzerland?

a. 2.37%

b. 1.37%

c. 2.63%

d. 2.46%

e. 3.27%