Question

You observe that the EUR/HKD spot exchange rate (i.e., the price of 1 Euro in terms of Hong Kong Dollars) is 8.91 and the 1-year EUR/HKD forward exchange rate is quoted at 9.5.(Total 10 marks)

(a) Does an arbitrage opportunity exist given that the 1-year deposit rates in Hong Kong and Europe and are 2.5% and 0.5%, respectively?

(b) If so, outline an arbitrage strategy and explain step by step why your strategy yields risk-free profits.

Answer #1

Suppose the 6-month risk free spot rate in HKD is 1%
continuously compounded, and the 6-month risk free rate in NZD is
3% continuously compounded. The current exchange rate is 5
HKD/NZD.
a. Suppose again that our usual assumptions hold, i.e., no
constraints or other frictions. Suppose you can enter a forward
contract to buy or sell NZD 1 for HKD 5. Is there an arbitrage? If
yes, describe an arbitrage strategy. If no, briefly explain why
not.
b. Suppose...

Assume spot FX rates of $1.3754/Euro and $1.6561/BP. What should
the cross
exchange rate for Euro/BP (Euros per unit of BP)? If the market
rate is 1.286Euro/BP,
describe the arbitrage strategy. Assume that you have $100,000
to invest, what will be
profit of the arbitrage strategy (so your work step by
step)? If arbitrage profit exists,
what market forces would occur to eliminate the arbitrage
opportunity?

Find the one year Futures exchange rate for the Euro.
Spot = $1.12 per Euro
Risk Free Rate in USA = 3%
Risk Free Rate in Europe = 6%
If the 1 year Futures exchange rate is $1.11, what could you do
to receive an arbitrage profit?

You observe the following exchange rate quotes:
$ 1.1830 / EUR
$ 1.5240 / GBP
GBP 0.7815 / EUR
If you start with $ 1 million, what arbitrage profit in dollars
can you make using triangular arbitrage?
Please show work

Suppose that the current spot exchange rate is $1.2/£ and the
1-year forward exchange rate is $1.3/£. The U.S. 1-year interest
rate is 5 percent and the U.K. 1-year interest rate is 6 percent.
Assume that you can borrow up to $1.2M or £1M.
a. Show how to realize a certain profit via covered interest
arbitrage, assuming that you want to realize profit in terms of
U.S. dollars. Also determine the size of your arbitrage profit in
U.S. dollars. Please show...

Suppose you observe that 90–day interest rate across the
eurozone is 5%, while the interest rate in the U.S. over the same
time period is 3%. Further, the spot rate and the 90–day forward
rate on the euro are both $1.25.
You have $500,000 that you wish to use in order to engage in
covered interest arbitrage.
To start, you exchange your $500,000 for __________.
euros, and deposit the funds in a bank in the eurozone. To lock
in the...

1. You observe that one U.S. dollar is currently equal to 3.6
Brazilian reals in the spot market. The one year US
interest rate is 7% and the one year Brazilian interest rate is 4%.
One year later, you observe that one U.S. dollar is now equal to
3.2 Brazilian reals in the spot market. You would have made a
profit if you had:
Borrowed U.S. dollars and invested in U.S. dollars
Borrowed Brazilian reals and invested in Brazilian reals
Borrowed...

3) Suppose that the spot exchange rate S(¥/€) between the yen
and the euro is currently
¥110/€, the 1-year euro interest rate is 6% p.a., and the 1-year
yen interest rate is 3% p.a.
Which of the following statements is MOST likely to be true?
A. The high interest rate currency must sell at a forward premium
when priced in the low
interest rate currency to prevent covered interest arbitrage
Page 3 of 13
B. Real interest parity does not...

Section 2 Calculations.
5pt each, 50 pts total. Show your work!
Suppose the dollar-pound exchange rate is quoted as $1.551 =
£1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥119.
What is the cross exchange rate, £ /¥? Round to 4 decimal
places.
Suppose the dealer provides this spot rate quote: S($|£) 1.8515
– 04. If you were to buy $1,000,000 worth of British pounds and
then sell them five minutes later. Calculate the dealer profit in...

1.Suppose that you are a
foreign exchange trader for a bank based in New York. You are faced
with the following market rates:
Spot exchange rate: SFr
0.9845/$.
6 month dollar interest rate =
1.0% per annum
6 month Swiss franc interest
rate = 0.25% per annum
6 month forward exchange rate:
= SFr 0.9785/$
a) Is there a Covered Interest
Arbitrage (CIA) opportunity here? Explain why or why
not.
b) Given the data in part (a), spell out the...

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