Takeshi Kamada, Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Takeshi's research associates - - and their computer models - - are predicting the spot rate to remain close to ¥118.00/$ for the coming 180 days. Using the same data as in the previous problem, analyze the UIA potential.

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Desiree Underwood

7 March, 11:03

Takeshi Kamada, Credit Suisse (Tokyo), observes that the ¥/$ spot rate has been holding steady, and both dollar and yen interest rates have remained relatively fixed over the past week. Takeshi wonders if he should try an uncovered interest arbitrage (UIA) and thereby save the cost of forward cover. Many of Takeshi's research associates - - and their computer models - - are predicting the spot rate to remain close to ¥118.00/$ for the coming 180 days. Using the same data as in the previous problem, analyze the UIA potential.

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Tyrell Guzman · Answer 1

Answer

Arbitrage fund available = $5,000,000

Yen to be borrowed = 5,000,000 * 118.69 = Yen 593450000

Amount invested in dollar = $5,000,000

He should enter into a forward agreement as well.

Amount recieved after 6 months = $5,000,000 * (1+0.04796/2) = $ 5119900

Amount recieved in Yen = 5119900*117.78 = Yen 603021822

Amount to be repaid after 6 months = Yen 593450000 * (1+0.03399/2) = Yen 603535682.75

Profit = 603535682.75 - 603021822 = Yen 513860.75

He will earn profit of Yen 513860.75