You, a foreign exchange trader for Green Valley Capital, observe that the spot rate between Chinese Yuan and US Dollars ( ¥/$) has been holding steady, and both Dollar and Yuan interest rates have remained relatively fixed over the past week. Your research associates at Green Valley Capital are predicting the spot rate to remain close to current spot rate for the coming month. You decide to make an uncovered interest arbitrage investement for one month to take advantage of the interest rate difference between Dollar and Yuan. You have $1 million or ¥ 6.5 million at the current spot rate for the uncovered interest arbitrage and face the following quotes:
Arbitrage fund available $ 1,000,000 or ¥ 6,500,000
Current spot exchange rate ¥ 6,5000/$
US Dollar annual interesr rate 2.4%
Chinese Yuan annual interest rate 6.0%
A) Show the steps and calculate the amount of the uncovered interest arbitrage profit if the sport rate becomes ¥ 6.5300/$ one month later.
B) Determine the break even spot rate ¥/$ (round to 4 decimal places) one month later that will result in a zero uncovered interest arbitrage profit.