Suppose you are given the following information: Ft($/¥)(3 month; 90 days) = $0.0098 St($/¥) = $0.0095...

Suppose you are given the following information:

F_t^($/¥)(3 month; 90 days) = $0.0098

S_t^($/¥) = $0.0095

i_t=0.04 (the annualized 3 month T-bill rate in the U.S.)

i_t*=0.03 (the annualized 3 month T-bill rate in Japan)

Is there a covered interest arbitrage opportunity? Explain.

Check: (1+i)

Compare: (1+i*)FS

Start by borrowing either $1,000,000 or ¥1,000,000 (only one of these is the correct currency. If you showed above that profits could be made by borrowing dollars, start by borrowing dollars. Conversely if you showed that a profit could be made by borrowing yen, start by borrowing yen). Show exactly how much profit could be made using the information in a, if an arbitrage opportunity actually existed (if one doesn’t, simply state that there is no arbitrage opportunity).

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jeff jeffy answered 1 year ago

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