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Homework 1 on Triangular Arbitrage with Bid-Ask Spread
S (€ / £) = S ($ / £) / S ( $ / €)
Suppose
Citibank’s quote: $1.5445 – 1.5460 / €
Barclay’s quote: $1.9443 – 1.9453 / £
Dresdner’s quote: €1.2789 – 1.2799 / £
Cross-rate between Citibank and Barclay should be € 1.2589 / £, compared to the actual Dresdner quote of €1.2789 / £.
Is triangular arbitrage possible if an investor starts with € 1 million and follows the following two strategies independently?
(a) Euros to Dollars to Pounds to Euros.
(b) Euros to Pounds to Dollars to Euros.
If there are arbitrage gains or losses in either case, how much?
The return on a bond which is sold before maturity
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A U.S. investor bought a 6 year German federal bond (Bund), the face value of the bonds is 1,000 EUR, the coupon is 1.5%, and the price 1, 125 EUR. At the time of buying the bond, the exchange rate was 1.3824 [USD/EUR], now, three years later, it is ..
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