Reference no: EM133120356
Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes.
Arbitrage funds available $5,000,000 or its Yen equivalent
Spot rate ¥/$ 118.60
360 day Forward rate ¥/$ 117.80
U.S. dollar annual interest rate 2.4%
Japanese yen annual interest rate 1.7%
How can he make a CIA profit?
a) By borrowing yen and investing in dollars
b) By borrowing dollars and investing in yen
c) CIA profit is not possible in this case.
What would be his arbitrage profit in Yen? (round to two decimal places).