Question

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What risks cannot be covered by arbitrage?

Answer #1

Arbitrage funds are most commonly sold as risk-free assets. They are pitched as if they will give only positive and no negative returns. In another way, they are sold as a sure way of earning absolute returns. But, in reality, arbitrage have their own risks and uncertainties which should always be considered while investing.

Some of them include:

1. The perfect execution of arbitrage opportunities is one arena of risk. They should be handled by someone who is having the market expertise and can provide returns to the customers.

2. **Liquidity of stocks
market**: The arbitrage stocks, if are not liquid enough,
will not give perfect returns and thus can become non-asset for the
user.

Please use the real world data to create a case of the
Rectangular arbitrage(Covered Interest arbitrage).

Please use the actual rate data to create a case of the
Rectangular arbitrage(Covered Interest arbitrage)

1： What is the international financial investment with Cover?
How does covered interest arbitrage work? Please discuss with an
example
2： What is the international financial investment without Cover?
How does uncovered interest arbitrage work? Please discuss with an
example.

Covered Interest Arbitrage. Assume the following
information:
Quoted
Price
Spot rate of Canadian dollar
$.90
90‑day forward rate of Canadian
dollar
$.88
90‑day Canadian interest rate
4.4%
90‑day U.S. interest
rate
1.6%
Given this information, what would be the yield
(percentage return) to a U.S. investor who used covered interest
arbitrage? (Assume the investor invests $1,000,000.) What market
forces would occur to eliminate any further possibilities of
covered interest arbitrage?

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The results of the blood pressure measurements taken of the same
patient by fourteen different second-year medical students are
listed in the table below.
Systolic Diastolic
138
82
130
91
135
100
140
100
120
80
125
90
120
80
130
80
130
80
144
98
143
105
140 ...

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A study of the relation between a daughters height and that of
her mother and father examined data from n=20 cases and found the
following linear regression equation: y=25.6+.377x1+.195x2, where y
is the daughter’s height, x1 is the mother’s height, and x2 is the
father’s height, with all heights measured in inches. Predict the
height of a daughter whose mother height is 64 inches and whose
father’s height...

Covered Interest Arbitrage. Assume the following information: •
British pound spot rate = $1.65. • British pound one-year forward
rate = $1.65 • British one-year interest rate = 12 %. • U.S.
one-year interest rate = 10 %. Explain how U.S. investors could use
covered interest arbitrage to lock in a higher yield than 9
percent. What would be their yield? Explain how the spot and
forward rates of the pound would change as covered interest
arbitrage occurs.

Covered interest rate arbitrage
As a trader for the London-based money market Commonwealth Fund,
you see the following quotes:
A. From Barclays Bank, one-year sterling
deposits/loans at 6.0 percent to 6.125 percent.
B. From Bangkok Bank, one-year Thaibaht (THB)
deposits/loans at 12.50 percent to 12.75 percent. Spot exchange
rate is THB 45 = £1, and one-year forward Thai baht is at 6.00
percent discount vis-à-vis the pound sterling.
Do you see profitable opportunities for interest rate arbitrage?
What are the...

why does the risk of uncovered intrest arbitrage
investing is different from the risk of covered interest arbitrage
investment

Given the following information, find the profits you can make
using covered interest arbitrage. Assume you can borrow either EUR
100,000 or JPY 14,619,883.04EUR interest rate = 3.5% per yearJPY
interest rate = 0.4530% per yearS (EUR/JPY) = EUR 0.00684 per JPYF
(EUR/JPY) = EUR 0.0074 per JPY for 1 year maturity forward
contract.
a. Which currency would you borrow to conduct covered-interest
arbitrage?
b. Assume you want your profits in euro, what covered-interest
arbitrage profits do you expect in...

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