Discuss the prevalence of currency arbitrage

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Reference no: EM132466662

The questions are:

Mr Lim requests answers to the following questions:

1. There appear to be a wide disparity between the spot quotes. If Teck wishes to simply use these markets to short BRL-unload BRL revenues, for eg-it would choose to transact with Bradesco. But is there opportunity for currency arbitrage contained in these spot rates? Assume that USD 1 million is directed toward this activity.

2. Mr Lim notes high interest rate in Brazil. How can Teck deploy USD1 million to exploit these rates? A possible strategy is to invest in a foreign currency and lock-in USD returns by using forward rates. Calculate the annualized return of such an investment. Note that quoted rates apply to six-month transactions buy have been annualized. Ignore bank commission and fees. Compare your strategy with covered interest arbitrage. What are the similarities and differences?

3. Employ an investment strategy opposite to that discussed in (2). That is, evaluate opportunities for deploying BRL 1 million in a USD-denominated interest-bearing deposit. Apply the method used in answering (2).

4. Discuss the prevalence of currency arbitrage. Which entities are best positioned to exploit them? What should be the optimal strategy of firms such as Teck?

Reference no: EM132466662

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