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Carry Trade Strategy)In Jan 2003, the interest rate on Japanese Yen was 0.5% and on Australia dollar was 6%. The spot rate was S(¥/AU$)=69.28. Tom Bohn, a hedge fund trader specializing in FX trading in Blackrock Inc, started a carry trade between Yen and Australia for one year. a. Compute the carry between Yen and AU$. Which currency was the funding currency? Target currency? b. If the spot rate was S(¥/AU$)=79.56 at the end of the year, compute the profit on the carry trade if Tom was able to borrow ¥100m or equivalent AU$. c. At what spot rate Tom would break even? d. What would be the market forward price in Jan 2003? e. If Tom was unable to borrow any currency, but was able to trade FX forwards and spots, what was the realistic alternative strategy for the carry trade?


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