Question

you can borrow or invest in the U.S. at an annual rate of 6 percent. Suppose...

you can borrow or invest in the U.S. at an annual rate of 6 percent. Suppose you logon to your favorite financial website and see that you could borrow or invest in Japan at 5% annual rate. The current exchange rate between dollar and the yen is $0.01/yen. you can use the futures market to lock it in at an exchange rate for one year from now at $0.0095/yen. Is there a profit opportunity here? Prove it by borrowing(either $1 million or $100 yen) in one country and investing in the other.

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Answer #1

Rate in 1 year shall be = 0.01*1.06/1.05=0.01010

Hence there is an arbitrage opportunity as this is not equal to the futures price.

Borrow 100 million Yen ¥ 100,000,000.00
Convert to USD at $0.01/yen $ 1,000,000.00 100000000*.01
Invest in US @6% $ 1,060,000.00 1000000*1.06
Convert at Future rate to yen ¥    111,578,947.37 1060000/.095
Amount to be repaid in Yen ¥    1,050,00,000.00
Savings ¥ 6,578,947.37
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