Quotes for usd-jpy 3-month forward rates

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a) Given the following information, what should be the quotes for USD/JPY 3-month forward rates? (Assume the interest rates are periodically compounded.)

Bid Ask

Spot rate USD/JPY: 104.35 104.45

JPY 3-month Libor = 0.25% 0.75%

US 3-month Libor = 0.40% 0.80%

b) If the current forward rate quotes for USD/JPY are 103.95 (bid) and 104.00 (ask), could you find any arbitrage opportunities? Please explain.

c) If so, how will you conduct the arbitrage? What are your arbitrage profits?

Reference no: EM132495007

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