Assignment 2 Due on Sep 22 11:59pm Problem set (5 problems): 1. CIA and UIA (10 points) Assume the following interest rate and exchange rate quotes. You can borrow $1,000,000 or its yen equivalent 101,000,000: Spot exchange rate: 101/$ 1-year forward rate: 100/$ 1-year $ interest rate: 1.50% 1-year interest rate: 0.70% a) CIA: Use the rule of thumb to identify whether coved interest arbitrage is worthwhile. If yes, what is your strategy and how much is your profit (show the steps)? b) UIA (carry trade): If you decide to seek the higher interest rate available in USD but not covering the forward dollar receipts, how should you redesign your strategy? Assess the riskiness of this decision. If you expect that the central bank of Japan will take more aggressive measures to devalue yen, how would it affect your profit from UIA? Assignment 2 Due on Sep 22 11:59pm Problem set (5 problems): 1. CIA and UIA (10 points) Assume the following interest rate and exchange rate quotes. You can borrow $1,000,000 or its yen equivalent 101,000,000: Spot exchange rate: 101/$ 1-year forward rate: 100/$ 1-year $ interest rate: 1.50% 1-year interest rate: 0.70% a) CIA: Use the rule of thumb to identify whether coved interest arbitrage is worthwhile. If yes, what is your strategy and how much is your profit (show the steps)? b) UIA (carry trade): If you decide to seek the higher interest rate available in USD but not covering the forward dollar receipts, how should you redesign your strategy? Assess the riskiness of this decision. If you expect that the central bank of Japan will take more aggressive measures to devalue yen, how would it affect your profit from UIA