Question

The spot rate of exchange of Japanese yen for US dollars is currently 100 yen per...

The spot rate of exchange of Japanese yen for US dollars is currently 100 yen per dollar but the one year forward rate is 101 yen per dollar. Determine the yield on a one year zero coupon US government security if the corresponding yield on a Japanese government security is 2%.If the yield on a one-year zero-coupon US government security was higher than what you calculated, how would you exploit this arbitrage opportunity?

Homework Answers

Answer #1
Spot Exchange rate 100 yen/USD
1 year Forward rate 101 yen/USD
Yield on Japanese Government Security 2%
Yield on US Government Security = (100/101)*(1+0.02)-1 = 0.0099
or 1%
Yield on US Government Security based on Interest parity theory is 1%
If the yield on US Security is higher than the 1%, Arbitrage Opportunity
Borrow money in Japan and convert yen into USD at Spot rate of 100 yen/$
Invest in US Government Security for one year and after one year convert the USD at 101 yen/$
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
3) Suppose that the spot exchange rate S(¥/€) between the yen and the euro is currently...
3) Suppose that the spot exchange rate S(¥/€) between the yen and the euro is currently ¥110/€, the 1-year euro interest rate is 6% p.a., and the 1-year yen interest rate is 3% p.a. Which of the following statements is MOST likely to be true? A. The high interest rate currency must sell at a forward premium when priced in the low interest rate currency to prevent covered interest arbitrage Page 3 of 13 B. Real interest parity does not...
Barry speculates in the foreign currency exchange market. Currently the spot price for the Japanese yen...
Barry speculates in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129/$ and the 6-month forward rate is ¥128 /$. Barry believes the yen will become ¥126.00/$ in the next six months. To profit as a speculator, Barry should ________ at ________ . Select one: a. buy dollars; the forward rate b. sell yen; the forward rate c. buy yen; the forward rate d. buy dollars; spot rate
Assume the spot exchange rate is 106.90 Japanese yen per U.S. dollar. If the inflation rate...
Assume the spot exchange rate is 106.90 Japanese yen per U.S. dollar. If the inflation rate in the U.S. is expected to be 2% and the inflation rate in Japan is 1% for the next two years, then the: exchange rate will increase. exchange rate will double. dollar will appreciate relative to the yen. dollar will become more valuable. Yen will strengthen against the dollar.
Assume that the 1 year forward exchange rate is 100 yen for 1 US dollar. Interest...
Assume that the 1 year forward exchange rate is 100 yen for 1 US dollar. Interest rate in dollars is 1 percent with annual compounding. Interest rate in yen is 0.3 percent with annual compounding. What is the spot exchange rate. PLEASE SHOW FORMULA AND CLEAR CALCULATION
Spot USD = .5000 GBP Spot USD = 80 Yen US Government One Year Yield =...
Spot USD = .5000 GBP Spot USD = 80 Yen US Government One Year Yield = 2.2% US Inflation Rate = 1.2% pa Great Britain Government One Year Yield = 1.8% Japanese Inflation Rate = 2.4% pa Outline how the USD is likely to change against the GBP and the Yen in the next year.
The spot exchange rate for Canadian dollars is $C1.33/$US.
The spot exchange rate for Canadian dollars is $C1.33/$US.Dollars                six-month interest rate               one-year interest rateCanada                             2%                                                 2.5%U.S.                                   2.5%                                              2.75%a. What is the six-month fair forward exchange rate?b. Is the Canadian dollar a discount or premium currency vs. the United States dollar?c. What does it cost in U.S. dollars to purchase $C1,000 now?d. How many Canadian dollars will you receive by entering a six-month forward contract to sell $1,000?e. What will it cost in Canadian dollars to purchase...
A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward exchange rate...
A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward exchange rate data is given in the table:    Spot Rate 1-year forward rate Contract Size $1.20 =€1.00 $1.25= €1.00 €62.500 $1.00 =¥100 $1.20= €120 ¥12,500,000 The one-year risk free rates are i$ = 4.03%; i€ = 6.05%; and i¥ = 1%. Detail a strategy using forward contract that will hedge exchange rate risk. Group of answer choices Sell €1m forward using 16 contracts at the...
The following are the spot and forward bid and ask rates for the Japanese yen/U.S. dollar...
The following are the spot and forward bid and ask rates for the Japanese yen/U.S. dollar (¥/$) exchange rate from January 20, 2011. By referring to these rates, answer the following questions (the US dollar is the home currency): Period Yen/$ Bidrate Yen/$ Ask Rate spot 85.41 85.46 1 month 85.02 85.05 2 months 84.86 84.90 3 months 84.37   84.42      a) Calculate the mid-rate for these maturities b) Calculate the annual forward premium for these maturities
The spot exchange rates for Japanese yen are $0.0082/¥ and $0.0098/¥. Calculate the indirect ask rate...
The spot exchange rates for Japanese yen are $0.0082/¥ and $0.0098/¥. Calculate the indirect ask rate for yen. Answer format: keep four decimals and include the price currency. Examples: 2.3021 (dollar); 2.3021 (yen).
The £ spot exchange rate is $1.6135/£, the € spot exchange rate is $1.2021/€, and the...
The £ spot exchange rate is $1.6135/£, the € spot exchange rate is $1.2021/€, and the £/€ spot rate is £0.7380/€.    a) First show whether an arbitrage opportunity exists. (4 points) b) Second, if arbitrage profits are available, describe a strategy to exploit the arbitrage opportunity and calculate the arbitrage profits you would earn. Start by borrowing 1,000 units in one currency and show that at the end of your trades you have more than you borrowed. (8 points)
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT