Suppose that three-month interest rates (annualized) in Japan and the United States are 6 percent and 8 percent, respectively. If the spot rate is ¥125=$1 and the 90-day forward rate is ¥115=$1:
a. Is there an opportunity for covered interest rate arbitrage?
b. How would you arbitrage? What is the arbitrage profit if any?
c. Where would you invest?
d. Where would you borrow?