Analyze the uncovered interest arbitrage

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Reference no: EM131878194

Michael Andrewsm Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Michael wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Michael's research associates -- and their computer models -- are predicting the spot rate to remain close to ¥118.00/$ for the coming 180 days. Using the data below, analyze the UIA potential.

Arbitrage funds available: $4.5M

Spot rate (¥/$): 118.60

180-day forward rate (¥/$): 117.80

Expected spot rate in 180 days (¥/$): 118.00

180-day U.S. dollar interest rate: 4.800%

180-day Japanese yen interest rate: 3.400%

Reference no: EM131878194

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