Where should you invest-borrow-dollar-equivalent investment

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Reference no: EM131021633

Suppose the six-month interest rates in Japan and the United States are 7% per year, compounded semi-annually, and 9% per year, compounded semi-annually, respectively. The spot rate is ¥142 : $1 (i.e., ¥/$ 142), and the 6 month forward rate is ¥139 : $1. Given this fact situation:

a) Where should you invest?

b) Where should you borrow?

c) Quantify the arbitrage profit, if any, that can be obtained on a $1 million dollar-equivalent investment?

Reference no: EM131021633

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