Mr Madzirerusa is a currency arbitrager for Finex and Company, Tokyo. The spot rate thismorning is V1 11.22/$ and early indications

Mr Madzirerusa is a currency arbitrager for Finex and Company, Tokyo. The spot rate thismorning is V1 11.22/$ and early indications are that short term interest rates in the USA, 90-day rates, are about to rise from their current level of 3.125%. The central bank of USA, the
Fed, is worried about rising inflation and has been publicly considering raising interest rates25 basis points (0.25%). The 90-day forward rate to Madzirerusa by local banks are roughlyhe same at V111.14/$. The current 90-day yen Eurodeposit rate of interest is 2.156%.Madzirerusa has V250 million at his dispa) (i) How can Madzirerusa make a profit through covered interest arbitrage?
(ii) How much in yen can he hope to make in profit in 90 days?b) If future spot exchange rates wereermined by interest differentials alone (that is, ifthe forward rate was a very good forecast of future spot exchange rates), what wouldMadzirerusa expect the spot rate to be in 90 days if the USA Federal Reserve does
the expectedc) If Madzirerusa’s expectation of the future spot rate is that of part (b), what profitcould he expect to make from uncovered interest arbitrage (not signing a forwardcontract)?


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