Suppose that the following exchange rates and interest rates prevail: Spot exchange rate: $ 1 = 121
Question:
Spot exchange rate: $ 1 = 121 yen
One- year forward rate: $ 1 = 130 yen
One- year interest rates: United States = 5.54%, Japan = 6.98%
Can a trader earn covered interest arbitrage profits? If not, explain why not. If possible, determine what the likely directional impact on each rate would be if arbitrageurs took advantage of the profit potential.
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The spot market is the cash market where currencies are immediately exchanged The forward exchang...View the full answer
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