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The present exchange rate is 1 Nigerian Niara (NGN) = U.S. $0.002896. The 1-year future rate is NGN = U.S. $0.002774. The yield on a 1-year U.S. bill is 3.2%. A yield of __________ on a 1-year Nigerian bill will make an investor indifferent between investing in the U.S. bill and the Nigerian bill (NTB).

Respuesta :

Tundexi

Answer:

7.74%

Explanation:

Present spot exchange rate = $0.002896

1-year forward rate = $0.002774

Yield on 1 year US Bill = 3.2%

Let Yield on 1 year Nigerian bill be 'R'

Now by the interest rate parity equation,

Forward rate = spot rate *( 1+ yield on US bill) /(1+ yield on Nigerian Bill)

$0.002774 = $0.002896 * (1.032/1+R )

(1+R) = 0.002896*1.032 / 0.002774

(1+R) = 1.0774

R = 1.0774 - 1

R = 0.0774

R = 7.74%

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