Suppose you can borrow $10 million or its yen equivalent, what actions would you take in 1-year yen forward market in order to make arbitrage profit? How much arbitrage profit you are likely to make? 

Forward market arbitrage problem question

To take advantage arbitrage, I will look to buy a large position in the one-year yen market. The spot currency is bought and sold at the same time. If the rate of the forward sale is less than the current open market rate, then there is an opportunity to make a profit.

It is important to me that the funds I have in each currency are sufficient so that all of my trades can be executed without issue. Since I can access $10 million, or the equivalent in yens, all my transactions should proceed as planned.

The amount of arbitrage profits one can earn depends on a number of factors, such as the size of a transaction and exchange rates.When compared to other strategies, it is still possible to earn a certain amount of profit as long as enough information about potential spreads and the availability of quotes for counterparties are collected in advance. By utilizing these strategies, we can capitalize on price differences that are short-term and increase our odds of earning a handsome sum.