A trader has $1 million available for exploiting an arbitrage opportunity. Given the following information, determine if such an opportunity exists and if so, the maximum amount of proﬁt that
Can be made by utilizing the $1 million. Ignore all trading costs and taxes.[LINE][LINE]S0 =
¥87[LINE]F1 = ¥84 (1-year forward)[LINE]RCDN = 5%[LINE]RS = 3%

Question

Quizplus · Accepted Answer

The trader can borrow $1 million in Japan at 5% and invest it in the US at 3%. The forward rate is ¥84, so the trader can sell the yen forward to lock in the exchange rate. The trader will receive ¥84 million in one year, which can be converted back to dollars at the spot rate of ¥87, resulting in a profit of $16,785.

A Trader Has $1 Million Available for Exploiting an Arbitrage