Question 2 (20 marks) Takeshi Yamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest A$5,000,000 or its yen equivalent, in a covered interest arbitrage between Australian dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Data Value Yen Equivalent Arbitrage funds available $5,000,000 362,800,000 Spot rate (/$) 72.56 180-day forward rate (\/$) 70.80 180-day Australian dollar interest rate 0.500% 180-day Japanese yen interest rate -0.300% a) Compute the difference in interest rates and the forward premium on the yen. (3 marks) b) Explain with reason whether your calculation from a) above indicates covered interest rate arbitrage potential (2 marks) c) Outline a strategy designed to exploit arbitrage potential. (5 marks) 1 d) Compute the potential profit from the chosen arbitrage strategy (5 marks) e) Compute the 180-day forward rate (/$) at which there will be no covered interest arbitrage (5 marks) Question 2 (20 marks) Takeshi Yamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest A$5,000,000 or its yen equivalent, in a covered interest arbitrage between Australian dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Data Value Yen Equivalent Arbitrage funds available $5,000,000 362,800,000 Spot rate (/$) 72.56 180-day forward rate (\/$) 70.80 180-day Australian dollar interest rate 0.500% 180-day Japanese yen interest rate -0.300% a) Compute the difference in interest rates and the forward premium on the yen. (3 marks) b) Explain with reason whether your calculation from a) above indicates covered interest rate arbitrage potential (2 marks) c) Outline a strategy designed to exploit arbitrage potential. (5 marks) 1 d) Compute the potential profit from the chosen arbitrage strategy (5 marks) e) Compute the 180-day forward rate (/$) at which there will be no covered interest arbitrage