Problem: Toshi Numata -- Japan Toshi Numata (CSFB - Tokyo) observes that the /$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Toshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Toshi's research associates -- and their computer models -- are predicting the spot rate to remain close to 110/$ for the coming 180 days. By showing calculations give an arguments whether he will have profit or not. Analyze the arbitrage potential. Assumptions Value Yen Equivalent Arbitrage funds available $8,000,000 Spot rate (/$) 110.20 180-day forward rate (/$) 109.80 Expected spot rate in 180 days (/$) 110.00 U.S. dollar interest rate 3.000% Japanese yen interest rate 1.800% Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discount, or expected change in the spot rate for UIA, invest in the higher interest yielding currency. If the difference in interest rates is less than the forward premium (or expected change in the spot rate), invest in the lower yielding currency.