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Steve Yamin specialises in foreign exchange trade and is exploring covered interest arbitrage opportunities. He...

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Accounting

Steve Yamin specialises in foreign exchange trade and is exploring covered interest arbitrage opportunities. He wants to invest US$2,000,000 or its yen equivalent, in an arbitrage between US dollars and Japanese yen. Currently, the following are the exchange rate and interest rate quotes:

Assumptions Value Yen Equivalent
Arbitrage funds available $2,000,000
Spot rate (/US$) 110.20
180-day forward rate (/US$) 109.80
180-day US. dollar interest rate 3.000%
180-day Japanese yen interest rate 1.800%

a. Determine whether the interest rate parity is currently holding

b. If the IRP is not holding, how he should carry out covered interest rate arbitrage?

c. Show all the steps and determine the arbitrage profit

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