​Kamada: CIA Japan​ (A). Takeshi​ Kamada, a foreign exchange trader at Credit Suisse​ (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest ​$5,050,000 or its yen​equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes. Is CIA profit​ possible? If​ so, how? Arbitrage funds available $ 5,050,000 Spot rate (¥/$) 118.58 180-day forward rate (¥/$) 117.88 U.S. dollar annual interest rate 4.807 % Japanese yen annual interest rate 3.391 %
The CIA profit potential is enter your response here​%, which tells Takeshi Kamada that he should borrow (the Japanese yen/the U.S. dollar) and invest in the higher yielding​ currency, (the Japanese yen/the U.S.dollar) ​, to lock in a covered interest arbitrage​ (CIA) profit. Takeshi Kamada generates a CIA profit of ¥enter your response here by investing in the (higher/lower) interest rate​ currency, the (dollar/yen) ​, and simultaneously selling the (dollar/yen)
proceeds forward into (dollar/yen) at a forward premium which does not completely negate the interest differential.