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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

Spot USD/JPY is 150.00 yen per USD. One-year interest rates are 1% in JPY and 5% in USD, continuously compounded. Under covered interest parity, the one-year forward rate (JPY per USD) is closest to:

The forward rate is about 144.12 yen per USD. With yen as the quoted currency, the forward equals spot times e raised to the yen rate minus the dollar rate, here e^-0.04. The USD trades at a forward discount because its interest rate is higher.

  1. A144.12Correct
  2. B150.00
  3. C156.30
  4. D155.77

Explanation

F = S e^{(r_JPY - r_USD)T} = 150 × e^{-0.04} = 150 × 0.960789 = 144.12. Option 155.77 uses the opposite sign. Option 156.30 is also a sign error with a different compounding.

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