If the Spot rate of EGPJPY is 6

Finance Dec 25, 2020

If the Spot rate of EGPJPY is 6.65 and the forward rate is 6.89. You are also given that the EGP interest rate is 8.25%, whereas the JPY interest rate is 8.59%. Compare the interest and exchange rates agios. State whether there is an arbitrage opportunity based on your calculation or not. (Round to two decimals)

Expert Solution

Exchange rate in Forward Market according to the interest rate parity

= Spot rate (1+foreign interest rate)/(1+domestic interest rate)

= 6.65(1.0859/1.0825)

= 6.670

The current rate has been 6.89so it can be said that there is an arbitrage opportunity because both the rates are not similar.

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