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Currency Exchange Arbitrage Profit

Suppose that six-month interest rates (annualized) in Japan and the United States are 7 percent and 9 percent, respectively. If the spot rate is ¥142:$1 and the ninety-day forward rate is ¥139:$1 and the 180 day forward rate is: ¥152:$1.

Assuming no transaction costs, what would be your arbitrage profit per dollar or dollar-equivalent borrowed?

Solution Preview

Borrow Yen 142 (equivalent of $1) today. Invest Yen in Japan @ 7% for 90 days. Enter into forward agreement (90 day forward) to sell Yen and forward agreement to purchase Yen in 180 ...

Solution Summary

The solution shows how to use the spot rate and forward rate to calculate the arbitrage profit in a situation that is applicable.

$2.19