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