Question
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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