What is covered and uncovered arbitrage

Reference no: EM13327820

Review book, notes, homework problems. Understand concepts and apply concepts through examples.

1. a. Using the exchange rates below is triangular arbitrage is possible with an initial investment of $1,000,000?

Three bank rates for currencies are:

Sapporo Bank 110¥/$
Northern Bank $2.5/£
Trust Bank 300¥/£

b. Is arbitrage possible if Trust Bank's rate is 275 ¥/£?

2. a. Bob Trader would like to speculate that the dollar will appreciate against the South African rand, ZAR in three months. Explain what Bob would do today if the spot rate is 8 ZAR/$, US interest rates are 2% and ZAR interest rates are 8%. Assume that Bob would like to have 8 million ZAR in one year.

b. At the end of three months the spot rate is 7.75 ZAR/$. Did Bob make or lose money on his speculation?

3. a. Suppose you are a Mexican firm that imports apples from Seneca Apples, NY. Listed below are quotes on Bloomberg. What would your total cost be if you were buying $?

Bid Ask
11.0000 Ps/$ 11.1000 Ps/$

b. If the three month forward points are:
Bid Ask
-17 -20
Would it be cheaper to buy $ in the spot market or three months forward?

3. Shown below are spot and forward points. Show the forward rates and calculate the premium or discount on the foreign currency.

Forward Rate Premium or Discount %
Spot $1.8343/£

1 month -54 $___________/£ __________________

3 month -156 $___________/£ __________________

6 month -295 $___________/£ __________________

Spot 1.6500CHF/$

1 month +10.5 CHF________/$ __________________
6 month +40 CHF________/$ __________________

4. Explain how the cross rates are found using the table below. For example what does row 1 column 2 mean? How does it relate to row 2, column 1? Pick 3 other cross rates and do the same. Why is there a 1 in the diagonal row?

Friday, February 22, 2013
Currency codes/names United Kingdom Pound Canadian Dollar Euro Hong Kong Dollar Japanese Yen Swiss Franc US Dollar
GBP 1 0.6449 0.8689 0.08467 0.007037 0.7062 0.6567
CAD 1.5511 1 1.3475 0.1313 0.010914 1.0953 1.0184
EUR 1.1511 0.7423 1 0.09749 0.0081 0.8128 0.7558
HKD 11.8121 7.6168 10.2597 1 0.08312 8.3412 7.7557
JPY 142.128 91.6516 123.478 12.0334 1 100.363 93.3234
CHF 1.4164 0.9134 1.2305 0.1199 0.009967 1 0.93
USD 1.523 0.9821 1.3232 0.1289 0.010717 1.0755 1

Source:oanda.com

Big Mac Index- How do we calculate? How do we interpret?

What is Covered and Uncovered Arbitrage?

Reference no: EM13327820

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