James Zhang, a foreign exchange trader at J. P. Morgan Chase, can borrow $800,000, or its yen equivalent, in a covered interest arbitrage between U. S. dollars and Japanese yen.

Spot exchange rate: JPY 124/USD six-month forward exchange rate:JPY123/USD

180-day USD interest rate: 1.5% 180-day JPY interest rate: 0.5%

Assume that there is no transactions cost. Explain the specific steps James must and calculate the Profit in U.S dollar from the covered interest arbitrage.

Conclusion:

Time=0

Time=1