Question

Suppose the 6-month risk free spot rate in HKD is 1% continuously compounded, and the 6-month risk free rate in NZD is 3% continuously compounded. The current exchange rate is 5 HKD/NZD.

a. Suppose again that our usual assumptions hold, i.e., no constraints or other frictions. Suppose you can enter a forward contract to buy or sell NZD 1 for HKD 5. Is there an arbitrage? If yes, describe an arbitrage strategy. If no, briefly explain why not.

b. Suppose now that there are transaction costs is spot and forward exchange rates. That is, to buy NZD 1 you have to pay HKD 5.01 in the spot market today or HKD 5.03 in the 6-month forward contract, and to sell NZD 1 you receive HKD 4.99 in the spot market today or HKD 4.97 in the 6-month forward contract. Is there an arbitrage? If yes, describe an arbitrage strategy. If no, briefly explain why not.

c. Consider again the prices in (b) and further assume that your borrowing costs are 0.5% higher than the risk free rate, while the income from lending is equal to the risk free rate. That is, if you borrow HKD for 6 months then you have to pay a 1.5% continuous compounded interest rate, and similarly, if you borrow NZD for 6 months then you have to pay a 3.5% continuous compounded interest rate. Is there an arbitrage? If yes, describe an arbitrage strategy. If no, briefly explain why not.

Answer #1

Calculating Forward Rate

=

FR= 4.903

(a) Yes there exists is an arbitrage opportunity we can sell today at 5 HKD/NZD and buy after 6 months at SR of 4.9 HKD/NZD giving a profit of 0.1HKD/NZD

(b) No Since buying price is higher at SR and FR

(c) Yes borrow in HKD @ 1.5% and lend in NZD @ 3%

Borrow 100,000 HKD @1.5% convert to NZD at SR 5.01HKD/NZD we get 19960 NZD lending it @ 3.5% we get after 6 months 20309 NZD convert it to HKD @ 4.97HKD/NZD we get 100936 HZD.

we have to pay 100750 HKD after 6 months

we have received 100936 HKD after 6 months

Hence a Total gain of 186 HKD

The S&R index spot price is 1100, the continuously
compounded risk-free rate is 5%, and the continuous dividend yield
on the index is 2%.
(a) Suppose you observe a 6-month forward price of 1120. What
arbitrage would you undertake?
(b) Suppose you observe a 6-month forward price of 1110. What
arbitrage would you undertake?
*YOU MUST ANSWER WITH DETAILED WORKING!!

You observe that the EUR/HKD spot exchange rate (i.e., the price
of 1 Euro in terms of Hong Kong Dollars) is 8.91 and the 1-year
EUR/HKD forward exchange rate is quoted at 9.5.(Total 10 marks)
(a) Does an arbitrage opportunity exist given that the
1-year deposit rates in Hong Kong and Europe and are 2.5% and 0.5%,
respectively?
(b) If so, outline an arbitrage strategy and explain
step by step why your strategy yields risk-free profits.

11. The spot exchange rate is 110.0JPN/USD and the semiannually
compounded risk-free rate of USD is 5.06%. You observe a exchange
forward with 9-month maturity is 112.9JPN/USD.
a. What risk-free rate of JPN is implied by this forward
price?
b. Suppose you believe the risk-free rate of JPN over the next 9
months will be only 0.5%. What arbitrage would you undertake? c.
Suppose you believe the risk-free rate of JPN will be 3 % over the
next 9 months....

The spot exchange rate is 110.0JPN/USD and the semiannually
compounded risk-free rate of USD is 5.06%. You observe a exchange
forward with 9-month maturity is 112.9JPN/USD.
What risk-free rate of JPN is implied by this forward
price?
Suppose you believe the risk-free rate of JPN over the next 9
months will be only 0.5%. What arbitrage would you undertake?
Suppose you believe the risk-free rate of JPN will be 3 % over
the next 9 months. What arbitrage would you...

The S&R index spot price is 1100, the continuously
compounded interest rate is 5%, and the dividend yield on the index
is 2%. (Round your answers to two digits after the decimal point
when rounding is necessary)
(A)What is the fair forward price for a 6-month forward?
(B)Suppose you observe a 6-month forward price of 1120, and you
decide to perform an arbitrage strategy. Illustrate the
transactions you will undertake and the amount of profit you will
make from this...

Suppose the spot $/Yen exchange rate is 0.008, the 1-year
continuously compounded dollar-
denominated rate is 5% and the 1-year continuously compounded
yen-denominated rate is 1%. Suppose
the 1-year forward exchange rate is 0.0084. Explain precisely
the transactions you could use (being
careful about currency of denomination) to make money with zero
initial investment and no risk. What
is such a strategy being referred to in the markets?

A stock index currently has a spot price of $1,100. The
risk-free rate is 9%, and the index does not pay dividends. You
observe that the 3-month forward price is $990. What arbitrage
strategy would you undertake?
a. Sell a forward contract, borrow $1,100, and buy the stock
index
b. Sell a forward contract, lend $1,100, and short-sell the
stock index
c.Sell a forward contract, borrow $1,100, and short-sell the
stock index
d. Buy a forward contract, borrow $1,100, and...

You are given:
(i) The spot exchange rate is 1.7 $/ £
(ii) The continuously compounded risk-free rate in dollars in
6.3%
(iii) The continuously compounded risk-free rate in pounds
sterling is 3.4%
(iv) a 6-month dollar-denominated European put option on pounds
with a strike of 1.7 $ /£ costs $0.04
(Question 6)
For conditions in Problem 5, determine the premium in pounds of
a 6-month denominated European put option on dollars with a strike
of 1/1.7 £/$.

The S&R index level is 1200 at t=0. The risk-free rate is 6%
continuously compounded. Suppose you observe a forward price with a
maturity of 6 months equal to 1230.
(a) What is the implied dividend yield?
(b) If you believe the actual dividend yield is 2% p.a., what
position do you take in order to earn arbitrage profit?
A. Long stock and short forward
B. Long stock and long forward
C. Short stock and long forward
D. Short stock...

The current Dollar-Pound exchange rate is 1.60 dollars per
British Pound. The U.S. and British risk-free interest rates
(annualized, continuously compounded) are 5% and 7.5%,
respectively. Answer the following questions.
A. What is the no arbitrage forward price of the British Pound
for a 6-month forward contract?
B. Suppose the actual forward price is 1.65 dollars per British
Pound. Illustrate the arbitrage opportunity.

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 6 minutes ago

asked 6 minutes ago

asked 8 minutes ago

asked 8 minutes ago

asked 9 minutes ago

asked 21 minutes ago

asked 29 minutes ago

asked 36 minutes ago

asked 39 minutes ago

asked 43 minutes ago

asked 1 hour ago