Assume that annual interest rates are 10 percent in the United States and 4 percent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.62/¥. a) If the forward rate is $0.67/¥, how could the FI arbitrage using a sum of $1million? b)What forward rate will prevent an arbitrage opportunity?
Assume that annual interest rates are 10 percent in the United States and 4 percent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.62/¥. a) If the forward rate is $0.67/¥, how could the FI arbitrage using a sum of $1million? b)What forward rate will prevent an arbitrage opportunity?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Assume that annual interest rates are 10 percent in the United States and 4 percent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.62/¥.
a) If the forward rate is $0.67/¥, how could the FI arbitrage using a sum of $1million?
b)What forward rate will prevent an arbitrage opportunity?
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