Question
Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively
Takeshi Kamada, Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of the forward cover. Many of Takeshi's research associates- and their computer models- are predicting the spot rate to remain close to /$ 118.00 for the coming year.
Arbitrage funds available $5,000,000 or its Yen equivalent
Spot rate /$ 118.60
360 day Forward rate /$ 117.80
Expected spot rate in 360 days /$ 118.00
U.S. dollar annual interest rate 2.4%
Japanese yen annual interest rate 1.7%
a) What would be his arbitrage profit in Yen? (round to two decimal places).
b) calculate the UIA profit potential (in yen). (round to two decimal places).
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