Question 2a) A foreign exchange trader at Credit Suisse in Tokyo,observes that the ¥/$ spot rate has been holding steady, andboth dollar and yen interest rates have remained relativelyfixed over the past week. The trader wonders if he should tryan uncovered interest arbitrage (UIA) and thereby save thecost of forward cover. Many of the trader's researchassociates -and their computer models are predicting thespot rate to remain close to ¥114.5/$ for the coming 180days. Using the following exchange rate and interest ratequotes, analyze the UIA potential.eArbitrage funds available: $2,000,000; Spot rate(\/$)=115.00; Expected spot rate in 180 days (\/$)=114.50;6-month U.S. dollar interest rate=6.4%; 6-month Japaneseyen interest rate =4.1%.b) How would your answer change, if the spot rate at the end of180 davs is ¥113.00/$?c) Suppose that the foreign exchange trader is exploringcovered interest arbitrage (CIA) possibilities between U.S.dollars and Japanese yen. Using the same data as in a), andassuming that the 180-day forward rate is ¥114.00/$, analysethe CIA potential.d) With reference to the impossible trinity, what are the possiblepolicy mixes that a nation could have?

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Spot (\/$)=115.00; Expected spot rate in 180 days (\/$)=114.50; 6-month U.S. dollar interest rate=6.4%; 6-month Japanese yen interest rate =4.1%. b) How would your answer change, if the spot rate at the end of 180 days is ¥113.00/$? c) Suppose that the foreign exchange trader is exploring covered interest arbitrage (CIA) possibilities between U.S. dollars and Japanese yen. Using the same data as in a), and

Spot (\/$)=115.00; Expected spot rate in 180 days (\/$)=114.50; 6-month U.S. dollar interest rate=6.4%; 6-month Japanese yen interest rate =4.1%. b) How would your answer change, if the spot rate at the end of 180 days is ¥113.00/$? c) Suppose that the foreign exchange trader is exploring covered interest arbitrage (CIA) possibilities between U.S. dollars and Japanese yen. Using the same data as in a), and

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 3BIC

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Kamada: UIA Japan (B). Takeshi Kamada, Credit Suisse (Tokyo), observes that the */$ spot rate has been holding steady, and that both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Takeshi's research associates and their computer models are predicting the spot rate to remain close to ¥118.00/$ for the coming 180 days. Using the data below, analyze the UIA potential. Arbitrage funds available Spot rate (*/S) 180-day forward rate (\/$) Expected spot rate in 180 days (\/S) U.S. dollar annual interest rate Japanese yen annual interest rate $ 5,000,000 118.54 117.76 118.00 4.796 % 3.404 % C and invest in the The UIA profit potential is %, which tells Takeshi Kamada that he should borrow to three decimal places and select from the drop-down menus.) If his expectations about the future spot rate, the one in effect in 180 days. prove…
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