(Solution) - a Pamela Itsuji a currency trader for a Japanese bank -(2025 Original AI-Free Solution)

Paper Details

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:

Japanese yen/U.S. dollar spot currency exchange rate ... ¥124.30/$1.00
New 3-month Japanese interest rate ............. 0.50%
3-month U.S. interest rate ................... 3.50%
3-month currency futures contract value ........ ¥123.2605/$1.00