Suppose the 12-month forward price of the yen in terms of dollars is .02 dollars per yen. Suppose the spot price of of the yen in terms of dollars is .019. Next, suppose that currently the annual interest rate on dollar deposits is 2%, while the interest rate on a comparable yen deposit is 1%. There are no transactions costs. Is there an arbitrage opportunity here? If so, explain exactly how you would take advantage of this situation to make riskless profits.
Suppose the 12-month forward price of the yen in terms of dollars is .02 dollars per yen. Suppose the spot price of of the yen in terms of dollars is .019. Next, suppose that currently the annual interest rate on dollar deposits is 2%, while the interest rate on a comparable yen deposit is 1%. There are no transactions costs. Is there an arbitrage opportunity here? If so, explain exactly how you would take advantage of this situation to make riskless profits.
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter19: International Finance And The Foreign Exchange Market
Section: Chapter Questions
Problem 1CQ
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Suppose the 12-month forward price of the yen in terms of dollars is
.02 dollars per yen. Suppose the spot price of of the yen in terms of dollars is .019.
Next, suppose that currently the annual interest rate on dollar deposits is 2%, while
the interest rate on a comparable yen deposit is 1%. There are no transactions costs.
Is there an arbitrage opportunity here? If so, explain exactly how you would take
advantage of this situation to make riskless profits.
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