8. Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes.

Arbitrage funds available $5,000,000 or its Yen equivalent

Spot rate /$ 118.60

360 day Forward rate /$ 117.80

U.S. dollar annual interest rate 2.4%

Japanese yen annual interest rate 1.7%

What would be his arbitrage profit in Yen? (round to two decimal places).

9. Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of the forward cover. Many of Takeshi's research associates- and their computer models- are predicting the spot rate to remain close to /$ 118.00 for the coming year. Using the data below, calculate the UIA profit potential (in yen). (round to two decimal places).

Arbitrage funds available $5,000,000 or its Yen equivalent

Spot rate /$ 118.60

360 day Forward rate /$ 117.80

Expected spot rate in 360 days /$ 118.00

U.S. dollar annual interest rate 2.4%

Japanese yen annual interest rate 1.7%

10. Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million (or its Swiss franc equivalent) for a short term money market investment and wonders if he should invest in U.S. dollars for three months, or make a CIA investment in the Swiss franc. He has the following quotes:

Arbitrage funds available $1,000,000 (or SFr equivalent)

Spot exchange rate (SFr/$) 1.2810

3-month forward rate (SFr/$) 1.2740

U.S. Dollar annual interest rate 4.8%

Swiss franc annual interest rate 3.2%

What is the CIA profit in dollars?

(Hint: notice that interest rates are quoted in annual terms, but that the short term investment is for 3-months. Hence, you need to get the term rates (3-month) first.)

13. Terry Lamoreaux has homes in both Sydney, Australia and Phoenix, Arizona. He travels between the two cities at least twice a year. Because of his frequent trips he wants to buy some new, high quality luggage. He's done his research and has decided to go with Briggs and Riley brand three-piece luggage set. There are retail stores in both Phoenix and Sydney. Terry wants to use purchasing power parity to determine if he is paying the same price no matter where he makes his purchase.

If the price of the 3-piece luggage remains the same in Phoenix one year from now, determine what the price of the luggage should be in Sydney in one-year's time if PPP holds true (in A$). The U.S. inflation rate is 1.15% and the Australian inflation rate is 3.13%.