Question

The £ spot exchange rate is $1.6135/£, the € spot exchange rate
is $1.2021/€, and the £/€ spot rate is £0.7380/€.

a) First show whether an arbitrage opportunity exists. (4
points)

b) Second, if arbitrage profits are available, describe a strategy
to exploit the arbitrage opportunity and calculate the arbitrage
profits you would earn. Start by borrowing 1,000 units in one
currency and show that at the end of your trades you have more than
you borrowed. (8 points)

Answer #1

a). The given £/€ is 0.7380.

First we need to calculate the cross rate as (£/$)*($/€) = (1/1.6135)*(1.2021) = £0.74503/€

This cross rate is not the same as the quoted rate of £0.7380/€ so there is an arbitrage opportunity here.

b). Applying the principal of buy low and sell high, we do the following:

1). Borrow 1,000 USD

2). Convert 1,000 USD to GBP @ $1.6135/£ to get 1,000/1.6135 = £ 619.77

3). Convert GBP to Euro @ £0.7380/€ to get 619.77/0.7380 = € 839.80

4). Finally, convert Euro to USD @ $1.2021/€ to get 839.80*1.2021 = $ 1,009.52

Net profit = 1,009.52 - 1,000 = USD 9.52

Suppose the current bid and ask spot rate quotes are:
$/€: 1.2621 – 25
$/£: 1.9135 – 41
What cross rate bid and ask quotes in terms of £/€ do these
prices suggest? (6 points)
BONUS: Suppose a dealer provides cross-rate bid and ask quotes of
£/€: 0.6650 – 70 Do these quotes suggest an arbitrage opportunity?
If so, describe the strategy to exploit the opportunity and
calculate the arbitrage profits. Start by borrowing 1,000 units in
one currency and...

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one-year forward price is $1.3700/€.
a. Do these prices and rates suggest an arbitrage opportunity?
(show why or why not – provide a numerical justification for your
answer and explain what that numerical justification means)?
b. If there is an arbitrage opportunity, include all of the
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Assume spot FX rates of $1.3754/Euro and $1.6561/BP. What should
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You are an investor with access to €1,000,000.00 or its
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Exchange rate
Interest rate
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€0.7000 = $1.00
€ = 4.15% per annum
F360(€/$)
€0.7010 = $1.00
$ = 4.7% per annum
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A US investor sees an arbitrage opportunity in the currency
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interest rates in the US and Switzerland are 0.25% and 0%,
respectively. The 3-month currency forward price is 1.0300 ($ per
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You observe that the EUR/HKD spot exchange rate (i.e., the price
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