# Forwards

pg. 54 Vol 6 CFAI The Japanese yen is currently trading at \$0.00812. US rate 4.5%. Japanese rate 2%. Forward market price \$0.00813. Calculate arbitrage profit. I understand that the forward price should be \$0.00832 and we should Long the contract. Could somebody please lay out the strategy WITHOUT converting into Yen. Thank you. Anish

i think the arbitrage is in yen, im working it out right now

.0237 yen profit per 1 yen borrowed 1luv

for some reason I don’t get the same result i get 0.00486 jpy wtf??

mmmm ok heres my reasoning (very very laimans terms) .00813/.00812 does not = 1.045/1.02 so interest rates in states are high so borrow 1 yen and convert to USD at todays rate to have .00812 USD’s. buy the forward contract after one year you will owe 1.02 yen and have .00812 * 1.045 = .0084854 USD convert back to yen at forward rate (.0084854/.00813) = 1.0437 pay back 1.02 yen to profit .0237 yen

the problem states 3 months contract though in the book not the post

oh well there u go no wonder lol big different anyways try the 1 year thing as i assumed above, do u get the same?

yes 0.0237 in one year

1uv

Thanks adalak. Florinpop, i intentionally ommited 3 months. I just wanted to know the strategy. Anish