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Would you take advantage of their arbitrage opportunity

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Reference no: EM132018845

Suppose the spot rate is $0.60/Yen, the (annualized) 6-month interest rate in the U.S. is 6.5%, and the (annualized) 6-month interest rate in Germany is 2.5%.

a. What is your estimate of today's 6-month forward rate (assuming that interest rate parity holds)?

b. Suppose the 6-month forward rate is currently quoted at $0.60/Yen. What would you do to take advantage of ther arbitrage opportunity? Where would you borrow and lend? Explain and show your work?

Reference no: EM132018845

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