Suppose interest rate differentials between the US and Japan is 4.5 percent and the yen is in 5.1 percent premium 1-year forward. The U.S. interest rate is 6 percent, while Japanese Interest rate is 1.5 percent. Assume you can borrow $10 millions or its yen equivalent. Is there an arbitrage profit, if so how much. Provide your solution assuming Japanese spot rate is 92 yen/$.

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To determine if there is an arbitrage profit we need to compare the cost of borrowing in one currency and investing in another with the potential prof... View the full answer