Question

Edward Jefferson, a forex trader, intend to invest $5,000,000 or its yen equivalent, in a CIA (covered interest arbitrage) between USD & JPY. He faced the following exchange rate & interest rate quotes.

Spot rate (¥/$)	118.5
180-day Forward rate (¥/$)	117.8
180-day USD interest rate	4.8%
180-day JPY interest rate	3.4%

a) Is CIA profit possible? How?
b) Edward is wondering if he should try an UIA (uncovered interest arbitrage). Analyze the UIA potential for the coming 180 days using the same data above.

Answer 1

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