a. Pamela Itsuji, a currency trader for a Japanese bank, is evaluating the price of a six- month Japanese yen/ U. S. dollar currency futures contract. She gathers the following currency and interest rate data:

Japanese yen/ U. S. dollar spot currency exchange rate ¥ 124.30/$ 1

6- month Japanese interest rate........... .10%

6- month U. S. interest rate ...........3.80%

Calculate the theoretical price for a six- month Japanese yen/ U. S. dollar currency futures contract, using the data above.

b. Itsuji is also reviewing the price of a three- month Japanese yen/ U. S. dollar currency futures contract, using the currency and interest rate data shown below. Because the three- month Japanese interest rate has just increased to .50 percent, Itsuji recognizes that an arbitrage opportunity exists and decides to borrow US$ 1 million to purchase Japanese yen. Calculate the yen arbitrage profit from Itsuji’s strategy, using the following data:

Japanese yen/ U. S. dollar spot currency exchange rate ¥ 124.30/$ 1

New 3- month Japanese interest rate......... .50%

3- month U. S. interest rate............ 3.50%

3- month currency futures contract value........ ¥ 123.2605/$ 1