Assume That Interest Rate Parity Holds Between the United States

Multiple Choice

Assume that interest rate parity holds between the United States and Japan. The U.S. one-year interest rate is 7 percent, and Japan's one-year interest rate is 6 percent. What is the approximate effective financing rate of a one-year loan denominated in Japanese yen assuming that the MNC covered its exposure by purchasing yen one year forward?

A) 6 percent
B) 7 percent
C) 1 percent
D) This question cannot be answered without more information.