Question

Kamada: CIA Japan (A) 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 equivalentina covered interest arbitrage between US dollars and Japanese y. He faced the following exchange rate and interest rate quotes Is CIA profit possible? If so, how? Arbitrage funds available Spot rate (W/S) 180-day forward rate (1/5) U.S. dollar annual interest rate Japanese yen annual interest rate $ 5.000.000 118 59 117.86 4808 % 3 390 % The CIA profit potentialis -0.177%, which tells Takeshi Kamada that he should borrow the Japanese yen and invest in the higher yielding currency, the US dollar to lock in a covered interest arbitrage (CIA) profit. (Round to three decimal places and select from the drop-down menus) Takeshi Kamada generates a CIA profit of by investing in the interest rate currency, the and simultaneously selling the proceeds forward into at a forward premium which does not completely negate the interest differential (Round to two decimal places and select from the drop down menus.)

Answer 1

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C w ENG 02:43 30-05-2020 27 Х AE39 . AB AC AD AE AF AG AH AI AJ AK AL AM AN AO A4 15 16 a. -0.176% 17 Finally, The CIA profit potential is (Round to three decimal places and select from the drop-down menus.) The CIA profit potential is negative -0.218%, which tells Takeshi Kamada that he should borrow the Japanese yen and invest in the higher yielding currency, the U.S.dollar, to lock in a covered interest arbitrage (CIA) profit. 18 19 20 -1.415% 21 22 23 STEP 1 First, calculate the difference in the interest rates. (Round to three decimal places.) [3.393% -4.808%] STEP 2 Next, calculate the forward premium on the yen. (Round to three decimal places.) |[=(118.59-117.86)/(117.86)*(360/180)*100%] 1.239% 24 25 26 b. 457375.25 Finally, calculate the covered interest arbitrage (CIA) profit Takeshi Kamada generates a CIA profit of yen 457375.25 by investing in the higher interest rate currency, the dollar, and simultaneously selling the dollar proceeds forward into yen at a forward premium which does not completely negate the interest differential. 27 28 29 30 31 32 33 STEP 1 First, calculate the proceeds of the investment at the U.S. dollar interest rate for 180-Days 5120200.00 (=5000000*(1+(4.808%/2))] STEP 2 Next, convert the U.S. dollars to Japanese yen 603466772.00 (=5120200*117.86] STEP 3 Next, convert the original investment amount from U.S. dollars to Japanese yen 592950000.00 [=5000000*118.59] 34 35 36 37 38 39 40 STEP 4 Then, calculate the proceeds at the Japanese yen interest rate for 180-Days 603009396.75 [=592950000*(1+(3.393%/2))] 11

Answer 2