Reference no: EM133115234

As a foreign exchange trader, you are presented on your computer terminal with the following three exchange rates posted by three different banks: Bank A offers a spot rate of Indian Rupees (INR): INR 61.245-61.258/$ Bank B offers a spot rate of Danish Kroner (DKK): DKK 5.8701-5.8812/$ Bank C offers a spot rate of INR 10.3850-10.4005/DKK Note: Assume there are 360 days in a year.

Required:

i. Calculate the implied cross exchange rate between INR and DKK.

ii. If you have U.S. Dollar ($) 2,000 at your disposal to invest on the above currencies, show whether you can generate a profit.

iii. Now assume you have INR 10,000 at your disposal instead of $ 2,000, and show whether you can generate a profit.

iv. Explain the source of the riskless arbitrage profit opportunity. Discuss it in the context of 'buy low and sell high' principle. Explain why the market will eventually go back to a no-arbitrage condition. (where appropriate, refer to the exchange rate quotes of the three banks)