Arizona State University FIN FIN MISC In the interest rate market, you are given annual interest rates of X percent in the United States, and 7 percent in Japan. The interest rates are…
X percent in the United States, and 7 percent in Japan. The interest rates are continuously compounded. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. In the foreign currency market, at time t=0 (Now), the spot rate is JPY 125 per one USD. And the one-year forward exchange rate is USD 0.0077 per one JPY.
Assuming the no-arbitrage principle holds, then as per the interest rate parity theorem, what should be the annual interest rate in the US at time t=0 (now)? In other words, what is X?
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