The spot AUD/JPY exchange rate today is 80 yen per Australian dollar. The five-year forward AUD/JPY exchange rate is 87 yen per Australian dollar, and the five-year risk- free interest rates in Australia and Japan are 4% and 6% per annum, respectively. Explain the arbitrage strategy you’d implement to take advantage of this mispricing. Assume you can borrow 1,000 units of either currency at the risk-free rate. What is the present value of your profit in AUD?
The spot AUD/JPY exchange rate today is 80 yen per Australian dollar. The five-year forward AUD/JPY exchange rate is 87 yen per Australian dollar, and the five-year risk- free interest rates in Australia and Japan are 4% and 6% per annum, respectively. Explain the arbitrage strategy you’d implement to take advantage of this mispricing. Assume you can borrow 1,000 units of either currency at the risk-free rate. What is the present value of your profit in AUD?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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The spot AUD/JPY exchange rate today is 80 yen per Australian dollar. The five-year forward AUD/JPY exchange rate is 87 yen per Australian dollar, and the five-year risk- free interest rates in Australia and Japan are 4% and 6% per annum, respectively. Explain the arbitrage strategy you’d implement to take advantage of this mispricing. Assume you can borrow 1,000 units of either currency at the risk-free rate. What is the present value of your profit in AUD?
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