Transactions will arbitrageur undertake to arbitrage profits

Assignment Help Financial Management

Reference no: EM13883374

An arbitrager at Deutsche Bank notices that the yield on Brazilian Real 6-month risk-free bills is 5.5% per annum and the yield on U.S. 6-month T-bills is 7% per annum. The arbitrager also observes that the spot exchange rate is $0.6507/BRL and 6-month forward exchange rate is $0.6617/BRL. Assume that the spread in the borrowing and lending rates in either currency is zero.

Given the above quotes, compare the covered yield in BRL with the nominal yield in dollar and infer whether a covered interest arbitrage opportunity exists and what does it imply for funds flow due to arbitrage.

What transactions will the arbitrageur undertake to realize arbitrage profits in dollars net of transaction cost? Write all the steps clearly and show your calculations in each step. Assume that the bank has allowed a transaction size of $10 million or its BRL equivalent at the current spot rate. Also assume that the transaction cost is 0.2% of the transaction size to be deducted from the gross arbitrage profits at the end of 6-month period.

Suppose the nominal interest rates stay at the levels quoted above, what should be the no-arbitrage annualized forward premium/discount on BRL against $?.

Reference no: EM13883374

Questions Cloud

Explain how budget planning is related risk management : Explain how budget planning is related risk management for the RFP

Different policies on the payment of dividends : Different businesses have very different policies on the payment of dividends and what that communicates to stockholders. Basically there are two ways to reward stockholders: 1) pay them via dividends and 2) pay them with capital appreciation of thei..

What amount should be used as the initial cash flow : Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. ..

Bonds currently sell-yield to maturity : Crossfade Co. issued 16-year bonds two years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments.

Transactions will arbitrageur undertake to arbitrage profits : An arbitrager at Deutsche Bank notices that the yield on Brazilian Real 6-month risk-free bills is 5.5% per annum and the yield on U.S. 6-month T-bills is 7% per annum. What transactions will the arbitrageur undertake to realize arbitrage profits in ..

What is your rationale for formulating this strategy : What would be a strategic goal you would propose for a nursing home that would enable it to be profitable? What is your rationale for formulating this strategy

How exceptional managers realize a grand design : Strategic Management: How Exceptional Managers Realize a Grand Design. When used effectively to analyze an organizations strengths and weakness SWOT uncovers areas where the organization can dominate and identifies areas in which it cannot

What is the firms aftertax cost of debt if the tax rate : Minor ReMan issued 30-year, 8.5 percent semiannual bonds 6 years ago. The bonds currently sell at 101 percent of face value. What is the firm's aftertax cost of debt if the tax rate is 35 percent?

Calculate the value of each investment based : You have finally saved $10,000 and are ready to make your first investment. You have the three following alternatives for investing that money: Calculate the value of each investment based on you required rates of return. Which investment would you s..

User Account

All Pages