118.00 4.8% Question 3 a) Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steadily, and both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try to execute a covered interest arbitrage and thereby earn some profits. Using the data in the following table, analyze the potential profits from covered interest arbitrage. Assumptions Value Yen Equivalent Arbitrage funds available $5,000,000 Spot exchange rate SI 118.60 180-day forward rate SI 180-day (US dollar) interest rate (per annum) 180-day (Japanese yen) interest rate (per annum) 3.4% (6 marks) b) Based on information in a), what should be the expected 3-month forward rate that makes covered interest arbitrage is not feasible? (2 marks) The following is the forecasted net cash flows of Tuti Inc. The costs, revenue, and cash flow would be affected by three possible exchange rate scenarios for the Australian dollar (AS): (1) AS = $.60, (2) AS = 5.65, and (3) AS = 9.70. (Assume U.S. sales will be unaffected by the exchange rate.) Assume that AS earnings will be remitted to the U.S. parent at the end of the period. Ignore possible tax effects. Forecasted Net Cash Flows: Tuti Inc. (in millions of U.S. dollars and Australian dollars) Australian U.S. Business Business Sales $800 A$800 Cost of Materials 500 A$100 Operating Expenses 300 0 Interest Expense 100 Cash Flow -$100 A$700 Would Tuti's cash flow be favorably affected with appreciation or depreciation of the Australian dollar? (2 marks) d) In your opinion, should countries in a single region have a single monetary system OR adopt their own monetary system? Support your argument with example and explanation