Toshi Numata, FX analyst at Credit Suisse (Tokyo), observes that the /$ spot rate has been holding steady, and both U.

a)     Calculate the expected gain in $ from an Uncovered Interest Arbitrage (UIA) strategy using the expected spot rate in 90 days predicted by Toshi’s research associates.  

b)     The actual spot rate 90 days from today turned out to be72.00 (¥/$) instead of 100 (¥/$) as predicted. Discuss how Toshi’s interest arbitrage strategy in question a) is affected.

c)     Discuss how a Covered Interest Arbitrage strategy is different from an Uncovered Interest Arbitrage strategy. 

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