Exercices :

If example like SG/Mizuho Bank
A trader ALWAYS buy at bid
sell at price, no inverted 1/ask


Ex3
  
calculate international 
parity conditions hold 
between Japan and the 
United States.

difference i
difference pi
f0.1 = (F0 / S0) -1 * 100

Find the forecasted change 
in the Japanese yen/U.S. 
dollar (¥/$) exchange rate 
one year from now

are PPP, fisher effect,
interest rate parity respect
(are expected change in the 
USD/JPY exchange rate
equals to each other)?


EX4:
 
Spot exch r : USD/JPY 118.60
6-mth frwd r: USD/JPY 117.80 
6-month US i : 4.80%
6-month Japanese i :  3.40%

a.) Can Takeshi Kamada make
a covered interest arbitrage
profit?

F :forward exc r theoritical
Calculate F0.1(USD/JPY) =
S1(USD/JPY) * (1+i^JPY)/
(1+i^USD)
If F(theoritic)<Factual, yes
there is a covered interest
arbitrage

He can deposit $ 5 million
at 4.8% for 6 month

He can buy USD/JPY at spot
rate 118.6 (to get JPY)
Then he borrow JPY for
6 months at 3.40% i
Then he sell USD/JPY 
forward rate 117.8

Deposit 5 million US dollar
at 4.80%

Buy USD/JPY : buy 5 million
USD by selling 5,000,000 x 
118.60 = 593 million JPY

Borrow 593 million JPY at 
3.40%

Sell forward USD/JPY at 
117.80

At maturity:
  
Capital from deposit: 
  5,000,000 x (1 + 4.80%/2) 
  = 5,120,000 USD
  
Repay initial loan: 
593,000,000 x (1 + 3.40%/2))
= 603,081,000 JPY

Buy 603,081,000 JPY at 
117.80 = 603,081,000/117.80
=5,119,533.10 USD 
 
The result is positive 
by USD 5,120,000 – 
USD 5,119,533.10 =  
USD 466.90.


covered interest arbitrage =
capital from deposit - 
arbitrage operation