A widely popular strategy in the currency market is the so-called yen carry trade. It works as follows. A trader borrows yen from a Japanese bank, converts the funds into U.S. dollars in the foreign exchange market, and buys a U.S. bond for the equivalent amount. 

 

Let's assume that you can borrow yen 100 million at 1.0% for one year. The current spot rate is yen 100/$. The U.S. bond yields 5.0%. Suppose in one year the spot rate is yen 99/$. 

 

 Calculate how much profit you can make from this trade.

Answer rating: 100% (QA)

In this trade the trader is borrowing yen and investing in US bonds taking advantage of the interest ... View the full answer