Steve Yamin specialises in foreign exchange trade and is exploring covered interest arbitrage opportunities. He...
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| Steve Yamin specialises in foreign exchange trade and is exploring covered interest arbitrage opportunities. He wants to invest US$2,000,000 or its yen equivalent, in an arbitrage between US dollars and Japanese yen. Currently, the following are the exchange rate and interest rate quotes: | |||||||||||
| Assumptions | Value | Yen Equivalent | ||||||||
| Arbitrage funds available | $2,000,000 | |||||||||
| Spot rate (/US$) | 110.20 | |||||||||
| 180-day forward rate (/US$) | 109.80 | |||||||||
| 180-day US. dollar interest rate | 3.000% | |||||||||
| 180-day Japanese yen interest rate | 1.800% | |||||||||
| a. Determine whether the interest rate parity is currently holding
| ||||||||||
| b. If the IRP is not holding, how he should carry out covered interest rate arbitrage?
| ||||||||||
| c. Show all the steps and determine the arbitrage profit
| ||||||||||
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