At a point in time, foreign exchange arbitrageur noticed that the Japanese yen to U S dollar spot exchange rate was $ 108 and the three month forward exchange rate was $ 107 30 The three month interest rate was 5 20 percent per annum and the three month interest rate was 1 20 percent per annum a Wa...

a For three months r 130 and r 030 Because the exchange rate is in terms the appropriate expression ...

At a point in time, foreign exchange arbitrageur noticed that the Japanese yen to U.S. dollar spot

Question:

At a point in time, foreign exchange arbitrageur noticed that the Japanese yen to U.S. dollar spot was $:¥= 108 and the three-month forward was $:¥ = 107.30. The three-month % interest rate was 5.20 percent per annum and the three-month ¥ interest rate was 1.20 percent per annum.
a. Was interest rate parity holding?
b. Was there an arbitrage possibility? If yes, what steps would have been needed to make an arbitrage profit? Assuming that the arbitrageur was authorized to work with $1 million for this purpose, how much would the arbitrage profit have been in dollars?
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...