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Jen is a foreign exchange trader for a bank in New York. She has


Jen is a foreign exchange trader for a bank in New York. She has $5 million (or its Yen equivalent) at her disposal for a sho

Jen is a foreign exchange trader for a bank in New York. She has $5 million (or its Yen equivalent) at her disposal for a short term money market investment. She wonders if she should invest in US dollars for three months, or make a covered interest arbitrage (CIA) investment in the Yen for three months. She receives the following quotes: Assumptions Value Arbitrage funds available $5,000,000 Spot exchange rate (Y/5) 1102 3-month forward rate (Y/5) 109.8 U.S. dollar 3-month interest rate per annum 2 50096 Japanese 3-month interest rate per annum 1.800% a. Which currency is selling at a forward premium? b. Show if arbitrage is possible in the above scenario. C. Show all the steps and calculate the laccounting) profit from CIA. (You should designate every currency in every transaction, and be highly detailed. If you do not, you will lose points.) d. Using RPPP and assuming that the respective inflation rates are the same as the respective per annum interest rates, determine the correct or "true" forward rate. (Show all work; be detailed or lose points!) e. Explain how the IRP will be restored as a result of covered arbitrage activities. That is, describe the market forces that should realign the relationship.

Aug 28 2020 View more View Less

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