Question

Explain the causes of arbitrage between forward market hedge and money market hedge.

Answer #1

Forward Market :

Forward is a derivative contract where all terms and conditions about the rate, date, place , quantity etc are derived at the time of entering into a contract, however, actual implementation is done on a later date.

Arbitrage : a process of earning profits without taking any risk as such

Forward Market Hedge : means purchasing of a currency at a forward foreign exchange rate anticipating the upcoming rise or fall.

Money Market Hedge : is primarily used to offset the effect of fluctuations in the exchange rate, the domestic country locks the exchange rate based on the current rate and does not have to pay for the fuctuations.

The cause of arbitrage in this process would be if one knows the quoted 1 year US-dollar interest rate and sees the opportunity to take position in the market

Forward versus Money Market Hedge on Receivables. Assume the
following information:
180‑day U.S. interest rate = 0.07
180‑day British interest rate = 0.09
180‑day forward rate of British pound = $1.50
Spot rate of British pound = $1.41
Assume that Tax Corp. from the United States will receive
412,000 pounds in 180 days. How much more (or less) would the firm
receive in 180 days if it uses a forward hedge instead of a money
market hedge?

Forward versus Money Market Hedge on Payables. Assume
the following information:
90‑day U.S. interest rate
= 2% per 90 days or 8% per year compounded quarterly
90‑day Malaysian interest
rate = 2.5% per 90 days or 10% per year compounded
quarterly
Assume
borrowing and lending rates are the same for
simplicity.
90‑day forward rate of
Malaysian ringgit = $0.31
Spot rate of Malaysian
ringgit = $0.30
Assume that the Santa Barbara Co. in the...

Money Corp. frequently uses a forward hedge to hedge its
Malaysian ringgit (MYR) receivables. For the next month, Money has
identified its net exposure to the ringgit as being MYR1,600,000.
The 30-day forward rate is $0.23. Money's financial center has
indicated that the possible values of the Malaysian ringgit at the
end of next month are $0.20 and $0.25, with probabilities of 40%
and 60%, respectively. Calculate the revenue from hedging minus the
revenue from not hedging receivables.

Money Corp. frequently uses a forward hedge to hedge its
Malaysian ringgit (MYR) receivables. For the next month, Money has
identified its net exposure to the ringgit as being MYR1,500,000.
The 30-day forward rate is $.23. Furthermore, Money's financial
center has indicated that the possible values of the Malaysian
ringgit at the end of next month are $.20 and $.25, with
probabilities of .30 and .70, respectively. Based on this
information, the revenue from hedging minus the revenue from not...

A hedge fund can enter a 6-month forward contract on a stock for
a forward price of $41. The current stock price is $40. The 6-month
risk-free rate is 3% (per year) and the stock pays no dividends.
Describe an arbitrage opportunity.
Please, help me with this .

Explain how a U.S. corporation could hedge net receivables in
Malaysian ringgit with a forward contract. Explain how a U.S.
corporation could hedge payables in Canadian dollars with a forward
contract.

Money Market Hedges. How does a money market hedge differ for an
account receivable versus that of an account payable? Is it really
a meaningful difference?

Use the following information to calculate the dollar cost of
using a money market hedge to hedge 200,000 pounds of payables due
in 180 days. Assume the firm has no excess cash. Assume the spot
rate of the pound is $2.02, the 180-day forward rate is $2.00. The
British interest rate is 6%, and the U.S. interest rate is 4% over
the 180-day period. $351,210. $381,210. $371,210. $400,152

You are an analyst at a large hedge fund company. You are
analyzing the arbitrage opportunity related to Spot and Futures
party. Suppose that a six-month futures price on lean hog is 65
cents per pound and the spot price of lean hog is 62 cents. The
risk-free rate of interest is 10% per annum.
a. is there an arbitrage opportunity?
b. if there is an arbitrage opportunity, then will you borrow
money or lend money?
c. What is the...

Use the following information to calculate the dollar cost of
using a money market hedge to hedge 300,000 pounds of payables due
in 90 days. Assume the firm has no excess cash. Assume the spot
rate of the pound is $2.05, the 90-day forward rate is $2.00. The
British interest rate is 5%, and the U.S. interest rate is 4% over
the 90-day period. Please, show all your calculations step by step
how you reach your solution, a single numeric...

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