5.

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 exchange rate ¥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 0.50%, 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 exchange rate ¥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