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Yamagata is a currency trader who works with a bank in Tokyo. He is given an arbitrage fund of USD 2 million or the foreign

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Yamagata is a currency trader who works with a bank in Tokyo. He is given an arbitrage fund of USD 2 million or the foreign currency equivalent. He notices the following quotes in the market: Spot exchange rate: JPY/USD 118.6 6-month forward exchange rate: JPY/USD 117.8 6-month USD interest rate: 4.8% per year 6-month JPY interest rate: 1.5% per year (a) According to the above quotes, find the USD 6-month forward premium/discount. (3 marks) (b) Based on the forward rate, suggest whether the US dollar is going to appreciate or depreciate against Japanese yen? (2 marks) (c) What is the 6-month forward rate implied by interest rate parity theory? (6 marks) (d) Does the interest rate parity hold (assume zero transaction costs)? (2 marks) (e) Based on (d), can Yamagata make any arbitrage profit? (7 marks)

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