A new firm has identified what looks like a good opportunity to take advantage of interest rate differentials. The firm sees interest rates in Australia are currently 0.75% (for a 6 month period) while in Japan the rates are an incredible 0.15%. The current exchange rates are: $.00832/Yen and $0.77/Australian $ (A$) with the current cross rate = 92.27 Yen/A$. If our firm knows they can borrow up to the equivalent of $5mm US, how would the firm take advantage of this differential? Assume that interest rates do not change over the 6 month period.

Beginning of Investment Period:

Australian interest rate = 0.75% (for 6 months)

Japanese interest rate = 0.15% (for 6 months)

Exchange rate: $.00832/Yen

Exchange rate: $0.77/Australian $ (AUD)

Cross rate: 92.27 Yen/AUD

Where will the firm borrow funds?

If the firm can borrow up to the equivalent of $5mm, how many units of this currency will they borrow?

What will be the total amount due to repay the loan in 6 months? (in the borrowed currency)

Where with the firm invest?

When the borrowed funds are converted, how many units of the new currency will be invested?

At the end of the investment, what is the total value of the investment? (in the currency of the investment)

Amount the Form needs to pay back the loan (I am looking for the amount in terms of the invested currency, which is the fund used to pay back the loan)

Assuming exchange rates do not change during this 6 month period, what is the potential profit for the firm (in terms of US dollars)?