madaochenggong

I agree with stringreye, I mean the book does it in a confusing way, as the CFAI do everything that way.. If you ignore the return side of things, and the last part of their answer, basically you start out with 0, and you end up with 4.85, that 4.85 is risk free and therefore arbitrage.

But the book didnt take into account the interest you have to pay back on the loan, if you do then you end up with an annualised return of roughly 2% I think. What they do is compare your return before you pay back the yen interest, so they are comparing 3.88% with 2%, and they are saying because it exceeds the interest cost you have made a profit. The after interest return is then 1.88%, which is still a positive return