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Kamada: UIA Japan (B).Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steady, and that both dollar and yen interest

Kamada: UIA Japan (B).Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steady, and that both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Takeshi's research

associatesand

their computer

modelsare

predicting the spot rate to remain close to

118.00/$

for the coming 180 days. Using the data below, analyze the UIA potential.

Arbitrage funds available

$

5,100,000

Spot rate (/$)

118.51

180-day forward rate (/$)

117.79

Expected spot rate in 180 days (/$)

118.00

U.S. dollar annual interest rate

4.804

%

Japanese yen annual interest rate

3.401

%

The UIA profit potential is

______%,

which tells Takeshi Kamada that he should borrow

Dollar

Yen

and invest in the ____

Higher

Lower

yielding currency, the _____

Yen

Dollar

, to potentially gain on an uncovered basis (UIA).

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