Question

You have a borrowing capacity of 5 million USD, and 500 million JPY. You observe that the bid/ask interest rate quote on USD is 1%/3%. The bid/ask interest rate quote on the JPY is 0.5%/2%. The spot exchange rate is 90.1 JPY/USD, and you expect that the USD is going to appreciate to 101.9 JPY/USD over the next 6 months (180 days). If you conduct a speculative trade on your expectations of exchange rate change, and your expectations are correct, what will be your total profit, as measured in USD?

Answer 1

I have solved this sums in both the alternatives for the purpose of better understanding. One can also solve by arguing that the price for USD against JPY has been appreciated and so it is better to borrow JPY rather then USD and by giving this argument he can solve directly alternative 2.

I have assumed that the interest rate given in the sums is the rate of interestfor 6 month only as because no P.A is mention after the sum. One can assume the Interest rate for full year so while calculating borrouwing and deposit interest will be half.

please understand the concept and like my work thank you.