Question: Your name is Cathy and you work for a hedge fund and your job is to try make profits from trading in foreign exchange Today,

Your name is Cathy and you work for a hedge fund and your job is to try make profits from trading in foreign exchange Today, you see the following rates (the rates all have bid-ask spreads) being quoted by Bank of America: USD Libor interest- rate applicable from today for 6 months is 4.2% -4.25% YEN Libor interest -rate applicable from today for 6 months is 1.1% -1.2% Spot exchange rate (number of YEN per USD) is 116.20-116.23 . Banco Santander (a Spanish bank) is quoting the 6 month (outright) forward rate ( number of YEN per USD) as 114.19-114.26 . Assume 6 months is exactly 0.5 years. Suppose that you are authorized by your boss to use 50 mio USD as risk capital , how many USD can you make in arbitrage profit (I.e., guaranteed risk -free profit )

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To calculate the arbitrage profit we need to use the forward exchange rate provided by Banco Santander for 6 months The forward exchange rate is the r... View full answer

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