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Suppose today the two-year zero coupon rates are 4.63% in the US and 0.1% in Japan. Currently the exchange rate is $0.0085/yen. (a) Compute the

Suppose today the two-year zero coupon rates are 4.63% in the US and 0.1% in Japan. Currently the exchange rate is $0.0085/yen.

(a) Compute the 2-year forward exchange rate for the Yen, if you assume there are no arbitrage opportunities.

(b) You read in the paper that the 24-month forward is actually $0.0088/yen. Explain in detail how to exploit the mispricing using only the following instruments: buying or

selling US or Japanese 2-year zero-coupon bonds, and buying or selling the yen forward. Ignore transaction costs. If you could borrow only up to the equivalent of $1 million,

how much money would you make?

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