Kamada: CIA Japan (A).Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest

$5 comma 100 comma 0005,100,000

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. Is CIA profit possible? If so, how?

Arbitrage funds available	$	5,100,000
Spot rate (/$)		118.49
180-day forward rate (/$)		117.85
U.S. dollar annual interest rate		4.807	%
Japanese yen annual interest rate		3.397	%

1. The CIA profit potential is __________%,

which tells Takeshi Kamada that he should borrow (the Japanese yen OR the U.S. dollar) and invest in the higher-yielding currency,

(the Japanese yen OR the U.S.dollar), to lock in a covered interest arbitrage (CIA) profit. (Round to three decimal places and select from the drop-down menus.)

2. Takeshi Kamada generates a CIA profit of yen ______ by investing in the ( higher OR lower) interest rate currency, the (dollar OR yen), and simultaneously selling the (dollar OR yen) proceeds forward into (dollar OR yen) at a forward premium which does not completely negate the interest differential. (Round to two decimal places and select from the drop-down menus.)