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In: Finance

​Kamada: CIA Japan​ (A).  Takeshi​ Kamada, a foreign exchange trader at Credit Suisse​ (Tokyo), is exploring...

​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.)

Solutions

Expert Solution

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