Assume that annual interest rates are 8 percent in the United States and 4 percent in Japan.

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Assume that annual interest rates are 8 percent in the United States and 4 percent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs)

at these rates. The spot rate is $0.0125/¥.

a. If the forward rate is $0.0135/¥, how could the FI arbitrage using a sum of

$1 million? What is the expected spread?

b. What forward rate will prevent an arbitrage opportunity?

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Financial Institutions Management

ISBN: 9780078034800

8th Edition

Authors: Anthony Saunders, Marcia Cornett

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Question Posted: Jul 26, 2024 10:00 AM

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Assume that annual interest rates are 8 percent in the United States and 4 percent in Japan.

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Financial Institutions Management

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