9.

(Arbitrage with Positive Bid-Ask Spreads)

The current 180-day holding period return of

a USD loan is 1%. In other words, if you borrow 1 million USD now, you will have to pay back

1.01 million USD in 180 days. Dumb Bank gives the following 180 day forward exchange rates:

USD/EUR at 0.9850/55, USD/JPY at 104.30/40, and EUR/JPY at 104.70/78.

Note

: the bid

rates and ask rates differ.

(2 points) Can you arbitrage given the exchange rate? Why?

(9.1)

(4 points)

(9.2)

You would like to realize an arbitrage profit of

1

million USD

today

. You are allowed

to make 3 trades in the FOREX forward market and borrow USD. What should you do?

Describe each of your trades, including its direction and amount.