Toshi Numata, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He
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| Toshi Numata, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest A$2,000,000 or its yen equivalent, in a covered interest arbitrage between A$ and Japanese yen. He faced the following exchange rate and interest rate quotes: | ||||||||||
| Spot rate (/A$) | 110.20 | |||||||||
| 180-day forward rate (/A$) | 109.80 | |||||||||
| 180-day Aust. dollar interest rate | 3.000% | per year | ||||||||
| 180-day Japanese yen interest rate | 1.800% | per year | ||||||||
| The bank does not calculate transaction costs on any individual transaction, because these costs are part of the | ||||||||||
| overall operating budget of the arbitrage department. Explain and diagram the specific steps Toshi Numata must | ||||||||||
| take to make a covered interest arbitrage profit. |
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