Reference no: EM133071437
1. Consider the following quotes in the spot market:
- Bank A $ per € $1.60/€
- Bank B $ per £ $2.34/£
- Bank C € per £ €2.27/£
- Is there an arbitrage opportunity?
- If so, how would you take advantage of the arbitrage opportunity? Assume you start with $1 million.
2. The following quotes are available to you.
You may either buy or sell at the stated rates.
Singapore dollar quote for Korean Won Won 714.00/S$
Hong Kong dollar quote for Singapore Bank HK$4.70/S$
Korean Won quote for Hong Kong dollars Won150.00/HK$
Assume you have an initial S$1,000,000.
- Is triangular arbitrage possible?
- If so, explain the steps and compute your profit.
3. Assume that you are the manager of the foreign exchange trading desk of a US exchange dealer.
The current spot exchange rate is $1.40/€.
The one-year interest rate in the US is 8%, and the rate in Europe is 10%.
Assume that a US customer wants to buy €25 million forward in one year.
- What forward rate would you offer the customer so that your firm nets a return of 2% over the
forward rate on the transaction?
Assume that you will hedge your exposure to exchange rate risk in the spot market.
4. Assume a US money manager has $100 million that needs to be invested short term.
They see the following information
Sport rate for £ is $1.5640/£, or £.6393/$
Forward rate for £ is $1.5328/£, or £.6524/$
The short-term interest rate in Britain is 12%, and the US short term rate is 9%.
- Is covered interest arbitrage possible?
- What is the strategy?
5. A US firm needing to borrow $200 million short term faces the following market information.
The Spot rate for Swiss Francs is $.4968/SF, or SF2.0161/$
The Forward Rate for Swiss Francs is $.5024/SF, or SF1.9889/$
Swiss short-term rate is 7%
US short term rate is 9.90%
- In which market should it borrow and why?
- What is the strategy?