Assumptions

Value

Arbitrage funds available ()

YEN 80,000,000

Equivalent arbitrage funds available ($)

USD 1,000,000

Spot rate (/$)

80.00

90-day forward rate (/$)

90.00

180-day forward rate (/$)

95.00

U.S. dollar LIBOR rate p.a. for the next 180 days

2.000%

Japanese yen LIBOR rate p.a. for the next 180 days

0.000%

a) Calculate expected gain in $ from an Uncovered Interest Arbitrage (UIA) strategy using the expected spot rate in 90 days (100Y/USD).

b) The actual spot rate 90 days from today turned out to be72.00 (/$) instead of 100 (/$) as predicted. How is the abitrage in first part affected?

Practice exam question, answer needed ASAP.