1. (Covered Interest Arbitrage) Harry Norman, a foreign exchange trader at UBS’s office in Tokyo has $2,000,000 or its yen equivalent to invest. He faces the following exchange rates and interest rates. Show how can he profit from the covered interest arbitrage? Spot rate (¥/$) 112.20 180-day forward rate (¥/$) 180-day U.S. dollar interest rate 180-day Japanese yen interest rate 109.80 4.00% 2.00%

Question

1. (Covered Interest Arbitrage) Harry Norman, a foreign exchange trader at UBS’s office in Tokyo has $2,000,000 or its yen equivalent to invest. He faces the following exchange rates and interest rates. Show how can he profit from the covered interest arbitrage? Spot rate (¥/$)     112.20  180-day forward rate (¥/$)    180-day U.S. dollar interest rate  180-day Japanese yen interest rate  109.80  4.00% 2.00%