Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Activity 6.2 Mr Madzirerusa is a currency arbitrager for Finex and Company, Tokyo. The spot rate this morning is 111.22/$ and early indications are that

image text in transcribed

Activity 6.2 Mr Madzirerusa is a currency arbitrager for Finex and Company, Tokyo. The spot rate this morning is 111.22/$ and early indications are that short term interest rates in the USA, 90- day rates, are about to rise from their current level of 3.125%. The central bank of USA, the Fed, is worried about rising inflation and has been publicly considering raising interest rates 25 basis points (0.25%). The 90-day forward rate to Madzirerusa by local banks are roughly the same at 111.14/$. The current 90-day yen Eurodeposit rate of interest is 2.156%. Madzirerusa has 250 million at his disposal. a) (1) How can Madzirerusa make a profit through covered interest arbitrage? (ii) How much in yen can he hope to make in profit in 90 days? b) If future spot exchange rates were determined by interest differentials alone (that is, if the forward rate was a very good forecast of future spot exchange rates), what would Madzirerusa expect the spot rate to be in 90 days if the USA Federal Reserve does the expected? c) If Madzirerusa's expectation of the future spot rate is that of part (b), what profit could he expect to make from uncovered interest arbitrage (not signing a forward contract)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Extreme Events In Finance A Handbook Of Extreme Value Theory And Its Applications

Authors: Francois Longin

1st Edition

1118650190, 978-1118650196

More Books

Students also viewed these Finance questions