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Jane is s speculator who buys Tanzania Shillings (Tas) call option with 31250 units, at a strike price of Kenya Shillings (Kes) 1.40 and a December settlement date. The current spot price as of that date is about Kes 1.39. Jane pays a premium of Kes. 0.012 per unit for the call option. Assume there are no brokerage fees. Just before the expiration date, the spot rate of the Tanzania shillings reaches Kes 1.41. At tis time, Jane exercises the call option and then immediately sell the Tanzania shillings at the spot rate to a bank.
Required:
A. Determine Jane's profit or loss.
B. While on your visit to Uganda, you notice that a bank quotes 1$=80 Kes, 1$=200 Ugs. The bank offers you 20 Ugs per Kenya Shillings (Kes) you refused the offer and immediately engaged in Triangular Arbitrage. Explain why and how you went about this.
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Academic Service Learning in Human Resource Management Education Author: Susan R. Madsen, Utah Valley State College, Orem, Utah
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