Question:

Analyst observes that the /$ spot rate has been holding steady, and both U.S. dollar and yen interest rates have remained relatively fixed over the past few weeks. Trying an interest arbitrage strategy. predicting the spot rate to move to 100.00/$ 90 days from today. Each year has 360 days:

Assumptions

Arbitrage funds available ()

YEN 80,000,000

Equivalent arbitrage funds available ($)

USD 1,000,000

Spot rate (/$)

80.00

90-day forward rate (/$)

90.00

180-day forward rate (/$)

95.00

U.S. dollar LIBOR rate p.a. for the next 180 days

2.000%

Japanese yen LIBOR rate p.a. for the next 180 days

0.000%

a)Calculate the expected gain in $ from an Uncovered Interest Arbitrage (UIA) strategy using the expected spot rate in 90 days predicted by Toshi's research associates.(3 marks)

b)The actual spot rate 90 days from today turned out to be72.00 (/$) instead of 100 (/$) as predicted. Discuss how Toshi's interest arbitrage strategy in question a) is affected. (3 marks)

c)Discuss how a Covered Interest Arbitrage strategy is different from an Uncovered Interest Arbitrage strategy

This is a practice question for an exam, no solution was provided