Suppose the spot rate is $0.60/Yen, the (annualized) 6-month interest rate in the U.S. is 6.5%, and the (annualized) 6-month interest rate in Germany is 2.5%.
a. What is your estimate of today's 6-month forward rate (assuming that interest rate parity holds)?
b. Suppose the 6-month forward rate is currently quoted at $0.60/Yen. What would you do to take advantage of ther arbitrage opportunity? Where would you borrow and lend? Explain and show your work?