Spot (\/$)=115.00; Expected spot rate in 180 days (\/$)=114.50; 6-month U.S. dollar interest rate=6.4%; 6-month Japanese yen interest rate =4.1%. b) How would your answer change, if the spot rate at the end of 180 days is ¥113.00/$? c) Suppose that the foreign exchange trader is exploring covered interest arbitrage (CIA) possibilities between U.S. dollars and Japanese yen. Using the same data as in a), and
Spot (\/$)=115.00; Expected spot rate in 180 days (\/$)=114.50; 6-month U.S. dollar interest rate=6.4%; 6-month Japanese yen interest rate =4.1%. b) How would your answer change, if the spot rate at the end of 180 days is ¥113.00/$? c) Suppose that the foreign exchange trader is exploring covered interest arbitrage (CIA) possibilities between U.S. dollars and Japanese yen. Using the same data as in a), and
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 2
a) A foreign exchange trader at Credit Suisse in Tokyo,
observes that the ¥/$ spot rate has been holding steady, and
both dollar and yen interest rates have remained relatively
fixed over the past week. The trader wonders if he should try
an uncovered interest arbitrage (UIA) and thereby save the
cost of forward cover. Many of the trader's research
associates -and their computer models are predicting the
spot rate to remain close to ¥114.5/$ for the coming 180
days. Using the following exchange rate and interest rate
quotes, analyze the UIA potential.
e
Arbitrage funds available: $2,000,000; Spot rate
(\/$)=115.00; Expected spot rate in 180 days (\/$)=114.50;
6-month U.S. dollar interest rate=6.4%; 6-month Japanese
yen interest rate =4.1%.
b) How would your answer change, if the spot rate at the end of
180 davs is ¥113.00/$?
c) Suppose that the foreign exchange trader is exploring
covered interest arbitrage (CIA) possibilities between U.S.
dollars and Japanese yen. Using the same data as in a), and
assuming that the 180-day forward rate is ¥114.00/$, analyse
the CIA potential.
d) With reference to the impossible trinity, what are the possible
policy mixes that a nation could have?
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