Assume that annual interest rates are 8 percent in the United States and 4 per- cent in

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Assume that annual interest rates are 8 percent in the United States and 4 per- cent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.60/\.

a. If the forward rate is $0.64/, 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? LO.1

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