these are 2 seperate questions 67.8) The spot exchange rate is ¥102.30/$, the 18

Question

these are 2 seperate questions

67.8) The spot exchange rate is ¥102.30/$, the 180-day forward exchange rate is ¥101.40/$, the 180-day dollar interest rate is 4.8% per year, and the 180-day yen interest rate is 3.4% per year. Models suggest that spot will remain close to ¥101.90/$ over the next 180 days. How much profit does investing $5,000,000 (or its yen equivalent) in a covered interest arbitrage between US dollars and Japanese yen yield?

67.9) The spot exchange rate is ¥102.30/$, the 180-day forward exchange rate is ¥101.40/$, the 180-day dollar interest rate is 4.8% per year, and the 180-day yen interest rate is 3.4% per year. Models suggest that spot will remain close to ¥101.90/$ over the next 180 days. How much profit does investing $5,000,000 (or its yen equivalent) in an uncovered interest arbitrage between US dollars and Japanese yen yield?

Explanation / Answer

aAs per IRP

Yen/$ 180days forward rate= 102.30*[1+(0.034/2)/1+(0.048/2)]= 101.60

The180 days $ forward is underpriced in the market .

Steps involved in calculation of Profit :

1. Borrow $ 5000000 @ 4.80% for 180 days , Outflow after 180 days= 5000000*1.024= $5120000

2Convert $ into yen getting 5000000*102.30= Yen511500000

3. Invest Yen @3.40% , Receiveable after 180days= 511500000*1.0170= Yen520195500

4. Sell Yen Forward @101.40, inflow after 180 days = 520195500/101.40= $5130133.14

Arbitrage Profit= Inflow- Outflow= 5130133.14-5000000= $ 130133.14

b.Steps involved in calculation of Profit :

1. Borrow $ 5000000 @ 4.80% for 180 days , Outflow after 180 days= 5000000*1.024= $5120000

2Convert $ into yen getting 5000000*102.30= Yen511500000

3. Invest Yen @3.40% , Receiveable after 180days= 511500000*1.0170= Yen520195500

4. Sell Yen @101.90inflow after 180 days = 520195500/101.90=$5104960.75

Profit= Inflow- Outflow= 5104960.75-5000000=$104960.74

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