Suppose the Japanese yen spot exchange rate is 118 yen = $1.00, and the British pound spot exchange rate is 1 pound = $1.81.
Question 1: What is the cross-rate in terms of yen per pound?
Question 2: Assume that U.S. six-month Treasury bills have an annualized rate of 6.2% while default-free Japanese bonds that mature in six months have an annualized rate of 5.0% and that interest rate parity holds. Find the six-month forward exchange rate in terms of dollars per yen. Hint: First find the spot exchange rate in terms of dollars per yen; you can use the equation on p.592 to solve this question; be sure to convert the annual rates to six-month rates. Check figure: The spot rate in terms of $/Yen is $0.008475/Yen.