When performing Currency Exchange Arbitrage, how do you know the home/foreign country interest rate for F0...

When performing Currency Exchange Arbitrage, how do you know the home/foreign country interest rate for F₀ = S₀ e^{(r_home-r_foreign)T}?

For example in this question (please show working and explain how to determine which is foreign/home):

The exchange rate in the spot market is 0.5 Chinese RMB for 1 Japanese JPY. The interest rates in Japan are 8% p.a, and 2% p.a in China, continuously compounded. The 6 month futures exchange rate is RMB 0.55. Show the arbitrage transaction.

Expert Solution

Working: -

Value of e is taken as 2.718 while compounding the interest continously

jeff jeffy answered 2 years ago

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