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

If I were able to borrow $10 million or its yen equivalent, I would look to take advantage of arbitrage opportunities by taking a long position in the 1-year yen forward market. This involves simultaneously buying the spot currency and selling it forward at a certain rate; if this rate is lower than what is currently trading on the open market then an immediate profit can be made.

In order to make this work for me however, it would be important that I acquire enough funds in both currencies so that my transactions can be settled without any problems. In this case since I have access to $10 million or its yen equivalent then all of my trades should go ahead according to plan; additionally, any costs associated with borrowing either currency should also be factored into calculations as these could potentially eat away at any profits earned.

In terms of how much arbitrage profit one can make depends on various factors such as size of transaction, exchange rates available etc.; generally speaking though it should still allow for some level of return provided enough information is gathered beforehand regarding potential spreads between currencies being bought/sold as well as availability of counterparty quotes when needed. Ultimately by utilizing such strategies we are able to capitalize on short-term discrepancies in prices hence increasing our chances of making a tidy sum from our investments.