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Calculate the profit that would be made

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Reference no: EM133028318

Question - You are considering a "carry trade" transaction between Sterling (GBP) and Japanese yen (JPY). The following information is available:-

Funds available to borrow 200 million JPY

Spot exchange rate 152.1400 JPY per GBP

GBP 3 month interest rate (annualised) 0.5%

JPY 3 month interest rate 0.00%

Current UK inflation rate 1.5%

Current Japanese inflation rate 0.5%

Required -

a) Calculate the profit that would be made if the exchange rate remains at its current level in three months' time.

b) How would the profit figure change if the exchange rate varies in line with relative purchasing power as predicted by current inflation?

Reference no: EM133028318

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