Question

(a) Mr. Armugam is an investor of Avid International just sold a share of ABM Corporation in Switzerland for SF4,300. The share was bought for SF5,080 a year ago. The exchange rate currently is SF1.60 per U.S. dollar now and was SF1.78 per dollar a year ago. He received SF120 as a cash dividend immediately before the share was sold. Determine the rate of return that he realizes on this investment in U.S. dollar terms.

(b) Assume that a bank in London quotes USD1.60/GBP and another in New York quotes JPY81.0/USD.

i. Compute the implied JPY/GBP exchange rate in to four decimal points with cross rate.

ii. If you have GBP64,800 now, compute the profit using triangular arbitrage.

.

Answer 1

(a)Investment in US dollar=5080/1.78=$2853.93

Amount Received after ONE year=SF4300+SF120=SF4420

Amount received in US dollar=4420/1.6=$2762.50

Rate of Return Realized in dollar term=(2762.50/2853.93)-1=-0.03204

Rate of Return Realized in dollar term=-3.20% (Rounded to two decimal place)

(b)

(i) Implied JPY/GBP exchange rate

1USD=81 JPY

1USD=(1/1.6)GBP=0.625 GBP

81JPY=0.625 GBP

JPY/GBP Rate :

(81/0.625)JPY/GBP

or,129.6JPY/GBP

For triangular arbitrage actual JPY/GBP rate is needed