Question

Vietcombank provides the following Spot quote USD/VND=23,150.00 – 23,250.00 and Vietinbank 23,152.00 – 23,252.00.

Explain whether and how two-point arbitrage profits could be realized by buying/selling USD and VND with the two banks. (1 mark) (maximum 50 words)

Predict the Spot USD/VND exchange rate on 28th February 2020. You need to provide quantitative calculations and/or qualitative explanations to support your prediction. (maximum 100 words)

Answer 1

1) Vietcom Bank USD/VND= 23,150 - 23,250

Vietin Bank USD/VND= 23152 - 23252

Case 1)

Buy from Vietcom @ 23250 and sell at Vietin @ 23152. No profit as buy>sell rate

Case 2)

Buy from Vietin @ 23252 and sell at Vietcom @ 23150. No profit as buy>sell rate

Therefore, no arbitrage is possible within these two banks.

2)

To predict the future spot price, we need the interest rates for both the currencies.

Future Spot Rate = Spot Rate (1+foreign Interest Rate)/(1+Domestic Interest Rate)

If, Foreign Interest rate < Domestic Interest Rate

then Future price will be higher than current spot rate

If, Foreign Interest rate > Domestic Interest Rate

then Future price will be lower than current spot rate