Assume that annual interest rates are 8 percent in the United States and 4 percent in Japan.
Question:
Assume that annual interest rates are 8 percent in the United States and 4 percent in Japan. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.0080/¥.
a. If the forward rate is $0.0085/¥, how could the FI arbitrage using a sum of $1million? What is the expected return?
b. What forward rate will prevent an arbitrage opportunity?
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a Borrow 1000000 in US by issuing CDs Interest and principal at yearend 1000000 x 108 ...View the full answer
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Related Book For 
Financial Institutions Management A Risk Management Approach
ISBN: 978-1259717772
9th edition
Authors: Anthony Saunders, Marcia Millon Cornett
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