Question

You have the following market data.

- Spot price for the Mexican Peso is $0.060 per Peso.
- Futures price is $0.064 per Peso on a contract
.**that expires in one month** - U.S. dollar LIBOR for one month is a continuously compounded rate of 1.48% per annum.
- Mexican LIBOR for one month is a continuously compounded rate of 2.71% per annum.
- The contract size is 500,000 Mexican Pesos.

What is the **total net profit** if you execute the
arbitrage strategy with one futures contract?

*Do not round values at intermediate steps in your
calculations. Enter your answer in dollars and cents to two
decimal places, but omit the $ symbol and commas. For
example, enter $1,234.56 as 1234.56 as your answer.*

Answer #1

Total net profit is **$35.27** by executing the
arbitrage strategy with one futures contract.

Spot price | 0.0600 | $ per peso | |||

Futures price | 0.0640 | $ per peso | one month expiry | ||

US dollar libor | 1.48% | per annum | |||

0.12% | per month | divide by 12 | |||

Mexican libor | 2.71% | per annum | |||

0.23% | per month | divide by 12 | |||

Contract size | 500000 | pesos | |||

Arbitrage strategy | |||||

1 contract | 500000 | pesos | |||

30,000 | $ | based on spot rate | |||

Borrow in $ | 30000 | $ | |||

1 month interest liability |
37 |
$ |
@0.12%per month | ||

Convert to Pesos | 500000 | pesos | |||

Lend pesos at mexican libor | |||||

get interest | 1,129 | pesos | @0.23% per month | ||

Convert to dollars |
72.27 |
$ |
|||

Net profit |
35.27 |
$ |
Interest received at mexican libor - interest liability at usd libor | ||

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