Calculation Of Arbitrage Profit By Exchange Of Mexican Peso With Yen Or Yuan

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Question

The spot MXN/¥ FX rate is S₀(MXN/¥) = MXN0.100/¥. The ¥ interest rate is 3.0% per annum and the MXN interest rate is 5.0% per annum, both quoted with annual compounding. Suppose that you observe a 9-month forward price of F_0,0.75 = MXN0.101/¥. How would you make an arbitrage profit? Describe the steps and calculate the profit.

Summary

The question belongs to Finance and it discusses about making arbitrate profit by exchanging Mexican Peso with Yen or Yuan.

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