You can borrow 1.000.000 euros or its equivalent in yens. If you can borrow or invest in euros at an annual interest rate of 3,5%, or in yens at an annual interest rate of 0,5%,

considering no transaction costs:

a) How can you arbitrage?

b) If euro interest rate grows to 5,5%, given the rest of conditions, should your

strategy change?

Data:

Spot Exchange rate - 130,96 #/.

One year forward exchange rate-> 125,15 /

EXERCISE 18 You can borrow 1.000.000 euros or its equivalent in yens. If you can borrow or invest in euros at an annual interest rate of 3,5%, or in yens at an annual interest rate of 0,5%, considering no transaction costs: a) How can you arbitrage? b) If euro interest rate grows to 5,5%, given the rest of conditions, should your strategy change? Data: Spot Exchange rate 130,96 */. One year forward exchange rate 125,15 \/