Question

3. With regards to Euro –credit loans, who are the borrowers? (1 point)

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4. Assume the bid rate of a New Zealand dollar is $0.330 while the ask rate is $0.335 at Bank X. Assume the bid rate of the New Zealand dollar is $0.320 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? (2 points)

5. You have $1,000,000 to invest:

Current spot rate of pound: $1.30

90-days forward rate of pound $1.28

3 month deposit rate in U.S 3%

3 month deposit rate in U.K 4%

If you covered interest rate arbitrage for a 90 days investment, what will be the amount of U.S dollar you will have after 90 days?   (3 points)

Answer 1

a) Euro credit loans are the loans given by US banks but denominated in different currency. These loans are given to US based MNC companies and government agencies which need the funds in other countries.

b)  We purchase 1 NZ dollar from bank Y at 0.325$ and sell it to Bank X at 0.33$

NZ dollars that can be bought by 1,000,000$ = 1,000,000/0.325 = 3,076,923.077

Gain on 1,000,000$ = 3,076,923.077 *(0.33-0.325) = 15,384.62

c) First we convert the $1mn into pound using spot rate of 1 pound=$1.3

$1,000,000/$1.30 = 769,231 pounds

These amount can be invested in 3 month deposit rate in UK for 4% and final amount will be

(1.04)*769,231 = 800,000 pounds

This is again converted into dollar using 90 days forward rate 1 pound=$1.28

800,000*1.28 = $1,024,000

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