PRIN.OF CORPORATE FINANCE
PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 27, Problem 1PS

Exchange rates* Look at Table 27.1.

  1. a. How many Japanese yen do you get for your dollar?
  2. b. What is the three-month forward rate for yen?
  3. c. Is the yen at a forward discount or premium on the dollar?
  4. d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen.
  5. e. If the one-year interest rate on dollars is 2.5% annually compounded, what do you think is the one-year interest rate on yen?
  6. f. According to the expectations theory, what is the expected spot rate for yen in three months’ time?
  7. g. According to purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan?

a)

Expert Solution
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Summary Introduction

To discuss: The Country J yen for a dollar.

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

b)

Expert Solution
Check Mark
Summary Introduction

To determine: 3-month forward rate for Country J yen.

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

c)

Expert Solution
Check Mark
Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

d)

Expert Solution
Check Mark
Summary Introduction

To determine: Annual percentage premium or discount on yen.

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.991=0.0238, or2.38 %

e)

Expert Solution
Check Mark
Summary Introduction

To determine: 1-year interest rate on yen

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

f)

Expert Solution
Check Mark
Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

g)

Expert Solution
Check Mark
Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61 1=0.00595, or0.595%

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