What should be the annual interest rate

Reference no: EM133633484

Question: In the interest rate market, you are given annual interest rates of X percent in the United States and 6 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 USD 0.0080 per one JPY. And the one-year forward exchange rate is JPY 118.000 per one USD.

Assuming the no-arbitrage principle holds, then as per the covered interest rate parity theorem, what should be the annual interest rate in the U.S. at time t=0 (now)? In other words, what is X?

Reference no: EM133633484

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