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2. Given the following information, find the JPY profits you can make using covered interest arbitrage. Assume you can borrow either EUR 100,000 or an
2. Given the following information, find the JPY profits you can make using covered interest arbitrage. Assume you can borrow either EUR 100,000 or an equivalent amount in JPY at the spot rate. EUR interest rate = 5.5% per year JPY interest rate = 0.8975% per year S (JPY/EUR) = JPY 129.63 per EUR F (JPY/EUR) = JPY 120.21 per EUR for 1 year maturity
a) Which currency would you borrow? Justify your answer.
b) Which currency would you invest for 1 year?
c) What is your profit from covered-interest arbitrage?
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