Question

a. Pamela Itsuji, a currency trader for a Japanese bank, is evaluating the price of a six- month Japanese yen/ U. S. dollar currency futures contract. She gathers the following currency and interest rate data:
Japanese yen/ U. S. dollar spot currency exchange rate ¥ 124.30/$ 1
6- month Japanese interest rate........... .10%
6- month U. S. interest rate ........... 3.80%
Calculate the theoretical price for a six- month Japanese yen/ U. S. dollar currency futures contract, using the data above.
b. Itsuji is also reviewing the price of a three- month Japanese yen/ U. S. dollar currency futures contract, using the currency and interest rate data shown below. Because the three- month Japanese interest rate has just increased to .50 percent, Itsuji recognizes that an arbitrage opportunity exists and decides to borrow US$ 1 million to purchase Japanese yen. Calculate the yen arbitrage profit from Itsuji’s strategy, using the following data:
Japanese yen/ U. S. dollar spot currency exchange rate ¥ 124.30/$ 1
New 3- month Japanese interest rate......... .50%
3- month U. S. interest rate............ 3.50%
3- month currency futures contract value........ ¥ 123.2605/$ 1


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  • CreatedJune 21, 2015
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