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Calculate the amount of arbitrage profits

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Reference no: EM132815903

Suppose that you're an FX trader for a bank in New York. You are faced with the following market rate:

Spot exchange rate = 1.4000/Pound

1 year dollar interest rate= 0.75%

1 year pound interest rate = 1.25%

1 year forward exchange rate = $1.3850/pound

a) is there a Covered Arbitrage (CIA) opportunity here? explain why or why not.

b) what actions would you take to profit from this situation. assume you're borrowing up to $10,000,000 in dollars or its equivalent in pounds to engage in this arbitrage.

  1. Which currency would you borrow and how much of it? which currency and how much would you lend?
  2. What is the forward transaction you would engage in? specify which currency and what quantity of the currency you would sell forward and the quantity of the currency you would buy forward.
  3. Calculate the amount of arbitrage profits? explain your calculations in words?

Reference no: EM132815903

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