You own $7,000. The dollar rate in Tokyo is 216.2463 Y/$. The Yen rate in New Yo

Question

You own $7,000. The dollar rate in Tokyo is 216.2463 Y/$. The Yen rate in New York is given in the following table:

COUNTRY-CURRENCY CONTRACT $/FOREIGN CURRENCY
Canada—dollar Spot .8432
30-day .8415
90-day .8393
Japan—yen Spot .004678
30-day .004710
90-day .004767
Switzerland—franc Spot .5165
30-day .5200
90-day .5449

Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars? Hint: Compare the Tokyo's direct quote with the New York's indirect quote.

Assuming no transaction costs, the rate between Tokyo and New York are out of line. Therefore, arbitrage profits are possible.

Is the above statement true or false?

Explanation / Answer

Answer:

Tokyo rate = 216.2463 Yen/$.

New York rate = 1/0.004678 = 213.7665 Yen/$.

The rate between Tokyo and New York is not aligned.

Arbitrage profits are possible.

Buy yen for $7,000 in the cheaper Tokyo market.

$7,000 x 216.2463 = 1,513,724.1 Yen

Sell the yen in the New York market at the existing rate.

1,513,724.1 Yen x .004678 = $7081.20

$7081.20 - $7,000 = $81.20

The net gain for the arbitrage scheme is $81.20.

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