In: Finance
Kamada: CIA Japan (A). Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest
$5 comma 100 comma 0005,100,000
or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is CIA profit possible? If so, how?
Arbitrage funds available |
$ |
5,100,000 |
|
Spot rate (¥/$) |
118.49 |
||
180-day forward rate (¥/$) |
117.85 |
||
U.S. dollar annual interest rate |
4.807 |
% |
|
Japanese yen annual interest rate |
3.397 |
% |
1. The CIA profit potential is __________%,
which tells Takeshi Kamada that he should borrow ▼ (the Japanese yen OR the U.S. dollar) and invest in the higher-yielding currency,
▼(the Japanese yen OR the U.S.dollar), to lock in a covered interest arbitrage (CIA) profit. (Round to three decimal places and select from the drop-down menus.)
2. Takeshi Kamada generates a CIA profit of yen ¥ ______ by investing in the ▼( higher OR lower) interest rate currency, the ▼ (dollar OR yen), and simultaneously selling the▼ (dollar OR yen) proceeds forward into▼ (dollar OR yen) at a forward premium which does not completely negate the interest differential. (Round to two decimal places and select from the drop-down menus.)