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Covered interest arbitrage/purchasing power parity
Q1. a)180-day interest rate is 1% & 3% respectively in the US and Japan spot rate & 180-day forward rate are equivalent= 120 yen per one US dollar. As a trader of a commercial bank how would I invest $1 million and earn risk free return by engaging in covered interest arbitage.
b)inflation rate in US and Japan & Japan respectively Spot rate =$.0083333 per one Japanese Yen or 120Y=1US$. How much does US dollar have to depreciate to maintain purchasing power parity?
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