Suppose that the following prices are quoted in the markets where forward rates and interest rates on Euro-$ and on Euro-¥ are all for 1-year ahead.
Bid Ask
Spot (¥/$) 99.95 100.05
Forward(¥/$) 97.00 98.00
Euro-$ (%) 4.95 5.05
Euro-¥ (%) 1.95 2.05
Which of the following is true?
The strategy that borrows ¥ in Euro-¥ market and invests equivalent in Euro-$ market is profitable.
There is insufficient information for making a judegment.
The strategy that borrows $ in Euro-$ market and invests equivalent in Euro-¥ market is profitable.
It is impossible to make an arbitrage profit.