hinzo Kamada, Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Shinzo wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Shinzo's research associates and their computer models are predicting the spot rate to remain close to ¥108.00/$ for the coming 180 days. Using the data as given below, analyze the UIA potential. (Show all the steps and calculations) Arbitrage funds available$6,000,000Spot rate (¥/$)108.70180-day forward rate (¥/$)107.80Expected spot rate in 180 days (¥/$)108.00180-day U.S. dollar interest rate4.800%180-day Japanese yen interest rate3.400%
hinzo Kamada, Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Shinzo wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Shinzo's research associates and their computer models are predicting the spot rate to remain close to ¥108.00/$ for the coming 180 days. Using the data as given below, analyze the UIA potential. (Show all the steps and calculations)
Arbitrage funds available
$6,000,000
Spot rate (¥/$)
108.70
180-day forward rate (¥/$)
107.80
Expected spot rate in 180 days (¥/$)
108.00
180-day U.S. dollar interest rate
4.800%
180-day Japanese yen interest rate
3.400%
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