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Calculate theoretical three-year forward rate of usd

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Interest rates in Japan are 4.25% p.a where as in USA 3.5% p.a.The USD/JPY spot rate is 13.

(i) Calculate the theoretical three-year forward rate of the USD implied by Interest rate parity.

(ii) Assume the actual two-year forward rate is USD/JPY 16. What is the percentage return from engaging in Covered Interest Arbitrage? Assume a transaction cost of 0.6% in the spot and the forward market. (Calculate the result as a percentage of your initial borrowing, accurate to 4 decimal places, make sure to include any opportunity cost in the calculation )

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Reference no: EM132652920

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