Takeshi Kamada, aforeign exchange trader at Credit Suisse (Tokyo), isexploring covered interest arbitrage possibilities. He is seeking to gain benefits on covered interest arbitrage in investingeither AUD50,000 or JPY250,000. He has been offered the following exchange rateand interest rate quotes.

Spot rate JPY68.84/AUD

180-day forward rate JPY68.48/AUD

180-day Australian dollar interest rate 4.8%

180-day Japanese yen interest rate 3.4%

Required:

1. Briefly explain the difference between interest rate parity theory (IRP) and the International Fisher Effect (IFE).(2 point)
2. Using the given information, estimate themarketforward premium or discount.(2 Point)
3. Estimate the forward premium or discount (interest rate differential)using the interest rate parity theory (IRP).(2 point)
4. Dose IRP hold? Explain (useyour answer topart 2 and 3).(2 Point)
5. Are their any covered interest rate arbitrage opportunity (use IRP condition to prove your answer). Illustrate how such opportunity can be capitalised (explaining each steps using calculation based on the above

Answer rating: 100% (QA)

Difference between IRP and IFE Interest Rate Parity IRP This theory suggests that the expected return on an investment should be equal in different co... View the full answer