3 Months JPY Libor 15 pa 3Months USD Libor 55 pa Spot excha

3 Months JPY Libor: 1.5% p.a.

3Months USD Libor : 5.5% p.a.

Spot exchange rate: USD 1 = JPY 110.00

How can you estimate the appropriate 3months \"forward\" exchange rate? Assume that the deal is done on 1st April, in order words, the spot date is 3rd April.

Solution

3 month forward exchange rate will be give by:

Forward Rate (Yen/Dollar)/Spot Rate (Yen/Dollar) = 1+Interest Rate Yen/1+Interest Rate $

Forward rate (Yen/Dollar) = Spot Rate(1+0.015/3)/(1+0.055/3)

= 110*1.005/1.018

= 108.60

Hence, 3 month forward Rate = 1 USD = Yen 108.60