(a) Steven Kurakiis a foreign exchange trader at Goldman Sachs in Tokyo. He is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000or its yen equivalent in a covered interest arbitrage between US dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is covered interest arbitrage profit possible in 180 days? If so, how? Assuming there are 360 days a year. Spot rate (yen/$)118.6 Annual forward rate (yen/$)117.8 Annual US dollar interest rate4.8% Annual Japanese yen interest rate3.4% b. Steven Kuraki observes that the yen/$ spot rate has been holding steady and that both dollar and yen interest rates have remained relatively fixed over the past week. Steven wonders if he should try an uncovered interest arbitrage and thereby save the cost of forwarding cover. Many of Steven’s research associates and their computer models are predicting the spot rate to remainclose to yen118/$ for the coming 180 days. Using the same dataaboveas in a, analyze and discuss the potential of uncovered interest arbitrage.
(a) Steven Kurakiis a foreign exchange trader at Goldman Sachs in Tokyo. He is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000or its yen equivalent in a covered interest arbitrage between US dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is covered interest arbitrage profit possible in 180 days? If so, how? Assuming there are 360 days a year.
Spot rate (yen/$)118.6
Annual forward rate (yen/$)117.8
Annual US dollar interest rate4.8%
Annual Japanese yen interest rate3.4%
b. Steven Kuraki observes that the yen/$ spot rate has been holding steady and that both dollar and yen interest rates have remained relatively fixed over the past week. Steven wonders if he should try an uncovered interest arbitrage and thereby save the cost of forwarding cover. Many of Steven’s research associates and their computer models are predicting the spot rate to remainclose to yen118/$ for the coming 180 days. Using the same dataaboveas in a, analyze and discuss the potential of uncovered interest arbitrage.
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