What could she expect to make in profit with this strategy

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Reference no: EM132031609

Tomoko Matsubara is a currency arbitrager for Showa and company, Yokohama.

The spot rate this morning is 120.50 Yen/$, and early indications are that 90-day interest rates in the United States will rise from their current level of 4.125%.

The U.S. Federal Reserve Bank, the central bank, is worried about rising inflation and has been publicly considering raising interest rates 25 basis points (1/4%).

The 90-day forward exchange rate quoted to Matsubara-san by local banks such as Daichi Kangyo are all about the same, 119.60 Yen/$.

The current 90-day Yen interest rate is 0.5000% (half of one percent). Matsubara-san has 300 million Yen at her disposal.

What should Matsubara-san do with her 300 million yen if she wished to speculate through uncovered interest arbitrage? What could she expect to make in profit with this strategy?

Reference no: EM132031609

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