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The first two points tell you what you need to do. The third one is a list of necessary transactions.
1) estimate fair price of foward contract:
F = S*(1+F)^t/(1+D)^t = $.00811*(1+3%)^.25/(1+5.5%)^.25=$0.00806
2) since forward is traded at a higher price, you should sell it and buy spot.
3) That would involve selling forward, borrowing money in the US, converting that amount to Japanese Yen, collecting interest rate, than sell Yen at $.00814 (delivering forward), paying back interest in the US, etc.
Does that help? |
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