In Reading 62, Q15 I think we need to return 121.82*1.02^(90/365) = 122.42 to cover our short such that the return is actually 123/122.42-1=.004738 or 1.90% a year Am I right or the official answer is right? Thanks!
You’re both right, the 3.88 is gross return before considering Japanese risk free borrowing cost of 2%, once you deduct the 2%, as per last paragraph of answer, you get the implied arbitrage profit of 1.88%, or just a rounding error away from your 1.90.
maybe not… My point: "short“ does not mean you borrow money, but borrow the units of the asset. what you are supposed to return is the units of asset you borrow, not the price you paid plus its time value. 3.88% is the return rate you will earn exceeding 2%, the costless arbitrage. Actually, the interest rate is like price of stock. my question is this: why we have to calculate after converting to Yen. can we do it by dollar?
The question does not ask for the arbitrage profit, simply what are the transactions. From what I see, it’s as straight forward as buy Yen forward and sell Yen spot.