$($please see image and answer for highlighted boxes$)$ Takeshi Kamada, a foreign exchange trader at Credit Svisse $($Tokyo$),$ is exploring covered interest arbitrage possibilities. He wants to

invest $$5,000,000$ 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.

Arbitrage Rule of Thumb: If the difference in interest rates is greater than the fonvard premium$/$discount$,$ or expected change in the spot

rate for ULA, invest in the higher interest yielding curency. If the difference in interest rates is less than the fonward premium $($or expected

change in the spot rate$),$ invest in the lower yielding currency.

Difference in interest rates $(i-i$$ $)$

This tells Takeshi Kamada that he should borrow yen and invest in the higher yielding currency, the U$.$S$.$ dollar, to lock$-$in a covered

interest arbitrage $($CIA$)$ profit.

U$.$S$.$ dollar interest rate $(180$ days$)$

$4\mathrm{.}800\%$

Takeshi Kamada generates a CIA profit by investing in the higher interest rate currency, the dollar, and simultaneously selling the dollar

proceeds forward into yen at a forward premivm which does not completely negate the interest differential.