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URL:  https://boards.fool.com/hi-everyone-sorry-to-intrude-but-thought-i-would-23815162.aspx

Subject:  Re: BOJ: Potentially Important Date:  3/9/2006  11:16 PM
Author:  TMFRivet Number:  15753 of 37017

Hi everyone,

Sorry to intrude but thought I would give it a whirl. The basic way to view this is with forward rates which imply what the future spot will be. The forward should be priced so that one can not conduct the sort of trade being mentioned.

Looking up the exchange rates

http://www.ozforex.com.au/cgi-bin/forwardRates.asp

The mid price for a 12 month forward is ~112.58 and using their current spot is ~ 118.195 Using the interest rate parity w/ 1 time period:

Forward/Spot = (1+ Japan's interest rate)/(1+ US interest rate)

112.58 / 118.195 = (1 + .00) / ( (1 + .05)

.9525 = .95238

Pretty close for rough numbers. Which is saying:

At time zero:

1) Borrow 100m Yen at 0% and exchange into $846,059 dollars at current spot of 118.195 Yen per Dollar.

2) Loan $846,059 dollars for a year at 5% in the US.

3) Sell a forward contract @ 112.58 exchange rate w/ 100m Yen notional

At year end:

4) Receive the loan plus interest $888,362

5) Deliver 100m Yen @ 112.58 which is the forward rate (ie expected spot rate) which costs you $888,257.

6) Profit is - ($888,362 - $888,257) - $105

7) Take your wife out for a nice dinner.

If you include transaction costs and don't use the midpoint price but use the ask price then this probably gets even closer to even and maybe you can afford an evening at McDonalds.

If you believe that the forward is mispriced or that the currencies and or interest rates are going to move in a manner that the forward isn't pricing then thats where a tactical bet can be placed and money to be made or lost. Otherwise their shouldn't be any money to be made due to interest rate parity and arbitrage.

Matthew
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