An investor enters into a short forward contract on 100


(a) An investor enters into a short forward contract on 100 million yen. The forward exchange rate for US$ 1 is set at US$0.012 per yen. How much does the investor lose or gain if the exchange rate at the end of the contract is (i) US$0.011 per yen, and (ii) US$0.013 per yen.

(b) Suppose that the six-month interest rates in the United States and Japan are 5% and 1% per year, respectively. The spot exchange rate is 100yen/US$. Find the six-month forward exchange rate.

(c) Suppose that an I-bank is offering the exact same forward as (b) but with a rate strictly lower than the rate that you found in (b). Find an arbitrage implementation to capitalize on the arbitrage opportunity for a long position of the forward.

Request for Solution File

Ask an Expert for Answer!!
Financial Management: An investor enters into a short forward contract on 100
Reference No:- TGS01183368

Expected delivery within 24 Hours