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Suppose that three month interest rates (annualised) in Japan and Australia are 1% and 6% respectively. Further HSBC Bank quotes a spot rate of Y82.64
Suppose that three month interest rates (annualised) in Japan and Australia are 1% and 6% respectively. Further HSBC Bank quotes a spot rate of Y82.64 and 90-day forward rate of 181.30. a. Does interest rate parity hold? b. Where would you invest? C. Where would you borrow? d. Do the foreign exchange quotes and interest rates present any arbitrage opportunity? If so, what arbitrage opportunity exists? Show your profits for AS5 million investment, assuming zero transaction costs. k.. If transaction costs were 0.25% per transaction, would your answer to d) above change
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