a. Pamela Itsuji, a currency trader for a Japanese bank, is evaluating the price of a 6-month Japanese yen/U.S. dollar currency futures contract. She gathers the following currency and interest rate data:
Japanese yen/U.S. dollar spot currency exchange rate
¥124.30/$1.00
6-month Japanese interest rate
0.10%
6-month U.S. interest rate
3.80%
Calculate the theoretical price for a 6-month Japanese yen/U.S. dollar currency futures contract, using the data above.
b. Itsuji is also reviewing the price of a 3-month Japanese yen/U.S. dollar currency futures contract, using the currency and interest rate data shown below. Because the 3-month Japanese interest rate has just increased to .50%, Itsuji recognizes that an arbitrage opportunity exists and decides to borrow $1 million U.S. dollars to purchase Japanese yen. Calculate the yen arbitrage profit from Itsuji’s strategy, using the following data:
New 3-month Japanese interest rate
0.50%
3-month U.S. interest rate
3.50%
3-month currency futures contract value
¥ XXXXXXXXXX/$1.00
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