Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000

or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is CIA profit possible? If so, how?

Arbitrage funds available $ 5,000,000

Spot rate ( = $1.00) 118.60

180-day forward rate ( = $1.00) 117.80

U.S. dollar annual interest rate 4.800 %

Japanese yen annual interest rate 3.400 %

Question content area bottom

Part 1

The CIA profit potential is enter your response here%,

which tells Takeshi Kamada that he should borrow

the Japanese yen

the U.S. dollar

and invest in the higher yielding currency,

the Japanese yen

the U.S.dollar

,

to lock in a covered interest arbitrage (CIA) profit.(Round to three decimal places and select from the drop-down menus.)

Part 2

Takeshi Kamada generates a CIA profit of enter your response here

by investing in the

higher

lower

interest rate currency, the

dollar

yen

,

and simultaneously selling the

dollar

yen

proceeds forward into

dollar

yen

at a forward premium which does not completely negate the interest differential.(Round to two decimal places and select from the drop-down menus.)

Kamada: CIA Japan (A). Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is CIA profit possible? If so, how? Arbitrage funds available $ 5,000,000 Spot rate (-$1.00) 118.60 117.80 180-day forward rate (= $1.00) US dollar annual interest rate 4,800 % Japanese yen annual interest rate 3,400 % and invest in the higher yielding currency. to lock in a covered interest arbitrage (CIA) The CIA profit potential is%, which tells Takeshi Kamada that he should borrow profit. (Round to three decimal places and select from the drop-down menus.) and simultaneously selling the at a forward premium which does Takeshi Kamada generates a CIA profit of not completely negate the interest differential. interest rate currency, the by investing in the (Round to two decimal places and select from the drop-down menus.) proceeds forward into