Differentiate between speculation and arbitraging, Marketing Management

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QUESTION

  • a) Using illustrative and numerical examples, differentiate between speculation and arbitraging in the context of foreign exchange market.
  • b) One year borrowing and deposit interest rates are 12% and 10% respectively in the US and 10% and 8.89% respectively in Switzerland. The spot exchange rate for the US dollars is $14 to the Swiss Franc. The 12-month forward rate is $14.52. The economies are pegged together, and have been so for a number of years.

Required-

  • Suggest a way you might profit from the pricing inconsistency that is presented here, assuming you have no initial investment funds
  • Can the scenario above persist forever? Explain your answer
  • What should be the spot rate which would bring a no-arbitrage situation?

 

 


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