Reference no: EM131069331

Part 1:

ASSIGNMENT

The following are quotes for several US currency dealers.

Inter-dealer arbitrage

1a. Is there an arbitrage opportunity in Singapore dollars? If so, what exchanges should you make to take advantage of it? (Be specific about which dealer you would select, which currency you would buy from or sell to that dealer, and how much of the other currency you would pay or receive.

b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

2a. Is there an arbitrage opportunity in British pounds? If so, what exchanges should you make to take advantage of it? (Be specific as indicated in question 1.)

b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

Triangular arbitrage (Inter-market) - assume that the highest bid and lowest ask for each currency are equal (so that the bid-ask spread is zero)

3. In the NY currency market, the exchange rate for Japanese yen (USC/JPY) is 118.9055 and the rate for Thai baht (USD/THB) is 32.623. What must the quote for the baht in Tokyo (THB/JPY) be if no arbitrage opportunity exists?

4a. Using the spot exchange rates indicated in the previous questions, if the exchange rate in Tokyo for the baht is 3.3182, what trades should you make to take advantage of the arbitrage opportunity? (For each transaction, be specific about where the trade takes place, which currency you would purchase (or sell) and which currency you would use to pay (or receive).)

b. How profitable is a round trip trade? State the profitability either in percent or basis points.

5a. In the NY currency market, the exchange rate for the Kuwaiti Dinar (USD/KWD) is 0.3035 and the exchange rate for the euro (EUR/USD) is 1.0868. If the dinar trades in Paris (EUR/KWD) for 0.3302, what trades should you make to take advantage of the arbitrage opportunity? (For each transaction, be specific as indicated in question 4.)

b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

6. In the NY currency market, the exchange rate for the Australian dollar (AUD/USD) is 0.7070 and the exchange rate for the British pound (GBP/USD) is 14252. If Australian dollars trade in London (GBP/AUD) for 2.0142, what trades should you make to take advantage of the arbitrage opportunity? (For each transaction, be specific as indicated in question 4.)

b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

Covered interest arbitrage (Inter-temporal) - assume that the highest bid and lowest ask are equal (i.e., that the bid-ask spread is zero)

7. Assume the interest rate of 1-year risk free debt denominated in US dollars is 1.24% and the interest rate on 1-year risk free debt denominated in euros is 0.10%, if today's spot market exchange rate for euros is 1.0863, what is the 1-year forward exchange rate if interest rate parity holds?

8. If the 1-year forward exchange rate for euros is 1.1011 and the spot market exchange rate and interest rates are as indicated in question 7, what trades should you make to take advantage of the arbitrage opportunity? (Immediate transactions will include: borrowing one currency at the risk free rate, exchanging one currency for another, investing one currency in risk free debt, and entering a long or short forward contract for a currency. Transactions in one year will include: repaying the loan, closing out the investment, and buying or selling a currency pursuant to the forward contract. Be specific about both current and future transactions.

b. How profitable is a round trip trade? (State the profitability, either in dollars or euros and in percent.)

9. Assume the interest rate on 6-month risk free debt denominated in US dollars is 0.45%, the interest rate on 6-month risk free debt denominated in Indonesian rupiah is 7.25%, if today's spot market exchange rate for the rupiah (USD/IDR) is 13,882.0, what must the 6-month forward rate on the rupiah be if interest rate parity holds?

10a. If the 6-month forward exchange rate for Indonesian rupiah is 14492.5 and the spot market exchange rate and interest rates are as indicated in question 9, what trades should you make to take advantage of the arbitrage opportunity? (Immediate transactions will include: borrowing one currency at the risk free rate, exchanging one currency for another, investing one currency in risk free debt, and entering a long or short forward contract for a currency. Transactions in 6 months will include: repaying the loan, closing out the investment, and buying or selling a currency pursuant to the forward contract. Be specific about both current and future transactions.

b. How profitable is a round trip trade? (State the profitability, either in dollars or rupiah and in percent.)

Part 2:

Inter-dealer arbitrage

1. Dealer A quotes the Indian rupee at: 67.2785 - 67.2850. Dealer B quotes the same currency at: 67.2985 - 67.3040. Is there an arbitrage opportunity in the Indian rupee? If so, what exchanges should you make to take advantage of it? (Indicate which dealer you should buy from and which you should sell to and, in each case, which currency you are buying or selling.) How profitable is a round trip trade? (State the profitability either in percent or basis points.)

2. Dealer A quotes the Australian dollar at: 0.7228 - 0.7230. Dealer B quotes the same currency at: 0.7232 - 0.7235. Is there an arbitrage opportunity in the Australian dollar? If so, what exchanges should you make to take advantage of it? (Indicate which dealer you should buy from and which you should sell to and, in each case, which currency you are buying or selling.) How profitable is a round trip trade? (State the profitability either in percent or basis points.)

Triangular arbitrage (Inter-market) - assume that the highest bid and lowest ask are equal (i.e., that the bid-ask spread is zero)

3. The NY quote for Malaysian ringgit is 4.0853, and for the Singapore dollar, 1.3823. What must the quote for the ringgit in Singapore (SGDMYR) be for there to be no arbitrage opportunity?

4. Using the spot exchange rates indicated in the previous question, if the exchange rate for the ringgit (SGDMYR) in Singapore is 2.9428, what trades should you make to take advantage of the arbitrage opportunity? That is, indicate where you should buy and where you should sell and, in each case, which currency you are buying or selling. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

5. The NY quote for Brazilian reals is 3.5654 and the quote for Paraguayan guarani is 5600.30. If guarani trade in Sao Paulo (BRLPYG) for 1571.75, describe the trades you should make to take advantage of the arbitrage opportunity? That is, indicate where you should buy and where you should sell and, in each case, which currency you are buying or selling. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

6. The NY quote for euros is 1.1215 and the quote for UAE dirham is 3.6735. If dirham trade in Paris (EURAED) for 4.1216, what trades should you make to take advantage of the arbitrage opportunity? That is, indicate where you should buy and where you should sell and, in each case, which currency you are buying or selling. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

7. The NY currency market, the quote for British pounds is 1.4589 and the quote for euros dollars is 1.1215. If euros trade in London (EURGBP) for 0.7689, what trades should you make to take advantage of the arbitrage opportunity? That is, indicate where you should buy and where you should sell and, in each case, which currency you are buying or selling. How profitable is a round trip trade? (State the profitability either in percent or basis points.)

Covered interest arbitrage (Inter-temporal) - assume that the highest bid and lowest ask are equal (i.e., that the bid-ask spread is zero) and all interest rates are stated as annual rates

8. If the interest rate on six-month inter-bank debt denominated in US dollars is 0.55%, the interest rate on six-month inter-bank debt denominated in Russian rubles is 11.05%, and the spot exchange rate for Russian rubles is 66.046, what must the six-month forward rate on the ruble be if there is no arbitrage opportunity (i.e., interest rate parity holds)?

9. If the six-month forward rate for Russian rubles (USDRUB) is 69.550 and the spot market exchange rate and interest rates are as indicated in the prior question, what trades should you make to take advantage of the arbitrage opportunity? That is, indicate which currency you should borrow, which currency you should invest, whether you should buy or sell in the spot market and whether you should enter a long or short forward contract. In each case, specify which currency you are borrowing, investing, buying or selling and the amount of the currency borrowed, loaned, bought or sold. How profitable is a round trip trade? (State the profitability either in dollars (or rubles) per dollar (or per ruble) borrowed, in percent or in basis points.)

10. If the one-year interest rate on US government debt is 1.75%, the one-year interest rate on Ghanian cedi is 23.0%, and the spot exchange rate for Ghanian cedi (USDGHC) is 0.8911, and the six-month forward rate for the cedi is 1.0776, what trades should you make to take advantage of the arbitrage opportunity? That is, indicate which currency you should borrow, which currency you should invest, whether you should buy or sell in the spot market and whether you should enter a long or short forward contract. In each case, specify which currency you are borrowing, investing, buying or selling and the amount of the currency borrowed, loaned, bought or sold. How profitable is a round trip trade? (State the profitability either in dollars per dollar borrowed, in percent or in basis points.)