Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He

Question:

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?

Assumptions _______________________Value ___________________Yen Equivalent

Arbitrage funds available................... $5,000,000 .............................593,000,000

Spot rate (¥/$) ....................................118.60

180-day forward rate (¥/$) .....................117.80

180-day U.S. dollar interest rate ..............4.800%

180-day Japanese yen interest rate............3.400%

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...