You own $7,000. The dollar rate in Tokyo is 216.2463 Y/$. The Yen rate in New Yo

Question

You own $7,000. The dollar rate in Tokyo is 216.2463 Y/$. The Yen rate in New York is given in the following table: COUNTRY-CURRENCY CONTRACT $/FOREIGN CURRENCY Canada—dollar Spot .8432 30-day .8415 90-day .8393 Japan—yen Spot .004678 30-day .004710 90-day .004767 Switzerland—franc Spot .5165 30-day .5200 90-day .5449 Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars? Hint: Compare the Tokyo's direct quote with the New York's indirect quote. Assuming no transaction costs, the rate between Tokyo and New York are out of line. Therefore, arbitrage profits are possible. Is the above statement true or false? PLEASE STATE IF IT IS TRUE OR FALSE.

Explanation / Answer

Amount that can be invested=$7,000.

Dollar rate in Tokyo =216.2463 Yens per dollar

Given Spot rate for one yen in dollars in Japan =.004678.

This means for one dollar number of Yens that can be obtained =1/.004678.

=213.7666.

As the number of yens that can be obtained for one dollar in Tokyo is more than the number of Yens that can be obtained in Newyork. There is a possibility for arbitrage.

Hence, the statement given is True.

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