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Macroeconomics

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Covered Interest Rate Parity Calculation

MACRO-YJX054

The covered interest rate parity condition must hold in the short run if currency traders are free to pursue arbitrage profits.

Suppose the spot price of Japanese yen is 100 yen per US dollar. Further, suppose that the interest rate on very safe bonds is 2% when denominated in U.S. dollars and 6% when denominated in Japanese yen.

Note: It may be helpful with this question to think of Japan as the home country.