(a) Munzara can make a profit through covered interest arbitrage by following these steps:
1. Borrowing in yen: Munzara borrows ¥800 million from a Japanese bank at the current interest rate of 2.156% for 90 days.
2. Converting yen to dollars: Munzara converts the borrowed yen to dollars at the spot exchange rate of ¥111.22/$, which gives him approximately $7,188,893.23.
3. Investing in the US: Munzara invests the dollars in a US bank or financial instrument that offers an interest rate higher than the yen interest rate.
4. Converting back to yen: After 90 days, Munzara converts the matured investment and interest earnings back to yen at the 90-day forward rate of ¥111.14/$.
5. Repaying the yen loan: Finally, Munzara repays the yen loan, including interest, to the Japanese bank.
The difference between the amount received in step 4 and the amount repaid in step 5 represents the profit from covered interest arbitrage.
(b) To calculate the profit in yen, we need to consider the interest earned on the dollar investment. Assuming Munzara finds a US investment offering a 90-day interest rate higher than 2.156%, we can estimate the profit after 90 days by subtracting the yen loan repayment from the dollar investment and interest converted back to yen at the 90-day forward rate.
(c) If future spot exchange rates were determined solely by interest rate differentials, and assuming the forward rate is an accurate predictor, Munzara would expect the spot rate in 90 days to be ¥111.14/$. This expectation is based on the assumption that the interest rate differential between the US and Japan would be reflected in the forward rate.
(d) If Munzara's expectation of the future spot rate is ¥111.14/$, and he engages in uncovered interest arbitrage, it means he speculates on the future spot rate without covering his position. If the actual spot rate in 90 days turns out to be ¥111.14/$, there would be no profit or loss from uncovered interest arbitrage, as his speculation aligns with the spot rate.