Question
Akira Numata, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $1,000,000 or its yen equivalent,
Akira Numata, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $1,000,000 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:
Assumptions Value Yen Equivalent
Arbitrage funds available $1,000,000 118,600,000
Spot rate (/$) 118.60
180-day forward rate (/$) 117.80
180-day U.S. dollar interest rate 4.800%
180-day Japanese yen interest rate 3.400%
Identify the Covered Interest Arbitrage opportunity and lay out the arbitrage strategy.
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