a. Pamela Itsuji, a currency trader for a Japanese bank, is evaluating the price of a 6-month

Question:

a. Pamela Itsuji, a currency trader for a Japanese bank, is evaluating the price of a 6-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 ..... ¥124.30/$1.00
6-month Japanese interest rate ................ 0.10%
6-month U.S. interest rate .................. 3.80%
Calculate the theoretical price for a 6-month Japanese yen/U.S. dollar currency futures contract, using the data above.
b. Itsuji is also reviewing the price of a 3-month Japanese yen/U.S. dollar currency futures contract, using the currency and interest rate data shown below. Because the 3-month Japanese interest rate has just increased to .50%, Itsuji recognizes that an arbitrage opportunity exists and decides to borrow $1 million U.S. dollars to purchase Japanese yen. Calculate the yen arbitrage profit from Itsuji’s strategy, using the following data:

Japanese yen/U.S. dollar spot currency ... ¥124.30/$1.00
New 3-month Japanese interest rate ............. 0.50%
3-month U.S. interest rate ................... 3.50%
3-month currency futures contract value ........ ¥123.2605/$1.00

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...