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 86.6 JPY/USD, and you expect that the USD is going to appreciate to 95.9 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

Profit will be made, if we borrow in depreciating currency and invest in appreciating currency
Numbers are in million
in This scenario, we borrow in JPY and invest in USD
We borrowed 500 JPY with the rate of interest 2% (higher for borrowing case)
JPY/USD rate	86.6 JPY/USD
Amount invested in USD	500/86.6	5.773672
Interest earned in USD	1% (lower for investment case)
After 6 Month
USD Investment	5.773672055
Interest	5.77362*.01*(180/360)	0.028868
Total	5.802540155
JPY Borrowing
Amount	500
Interest	500*.02*(180/360)	5.0
total	505.0
JPY in USD	505/95.9	5.265902
Total Inflow in USD	5.802540155
Total Outflow in USD	5.265901981
Net Profit	0.536638174