1. Assume you notice the following information. Assume you spend $1 million USD to create an arbitrage trading strategy. What is your profit is USD. Remember to consider the profit after you pay back your loan • Spot (CAD/USD)=1.75 • 1 Year Forward (CAD/USD) = 1.65 • 1 Year Canadian interest rate of 3% in Canadian Dollars (CAD) • 1 Year US interest rate of 4% in US Dollars (USD)

1. Assume you notice the following information. Assume you spend $1 million USD to create an arbitrage trading strategy. What is your profit is USD. Remember to consider the profit after you pay back your loan • Spot (CAD/USD)=1.75 • 1 Year Forward (CAD/USD) = 1.65 • 1 Year Canadian interest rate of 3% in Canadian Dollars (CAD) • 1 Year US interest rate of 4% in US Dollars (USD)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

Assume the following information: Current spot rate of Australian dollar = $.64 Forecasted spot rate of Australian dollar 1 year from now = $.59 1-year forward rate of Australian dollar = $.62 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the United States = 6% Use the above information to show the gain a trader could have from covered interest arbitrage
Jack Ma, a foreign exchange trader in Canada, has CAD. 4,000,000 for short-term money market investment and wants to make a profit based on the following rates. Explain specific steps that Jack Ma must take to make a covered interest arbitrage. CAD= Canadian Dollar JYP= Japanese Yen 6-month Canadian interest rate 1.6% per annum 6-month Yen interest rate 2.95% per annum Spot rate JYP 93.1395/CAD 6-month forward rate JYP 93.8380/CAD Step 1 1) Different i for Base rate -Quote rate = 2) Different between Spot and Forward = (1) + (2) = invest in _ borrow in _ Step 2 explain using table
Question 2 Suppose that you are working for ANZ Bank as a foreign exchange trader and are currently exploring the opportunity of engaging a cover interest arbitrage possibility. You can invest New Zealand Dollar (NZD) 10,000 or British pound (GBP) 10,000. You faced the following exchange rate and interest rate quotes. Sport rate (NZD/GBP) One-year forward rate (NZD/GBP) One-year New Zealand 2.7450-2.7550 2.6450-2.6550 Interest rate 7.75%-8.25% One-year British interest Rate 3.75%-4.25% a) Show how to realize Covered interest arbitrage (CIA), assuming you want to realize in term of NZD and determine the arbitrage profit/losses. b) the arbitrage profit/losses. Assume that you want to realize in term of GBP. Show the CIA process and determine
Given CHF 3,500,000 as your capital, calculate the possible profit from coveredinterest arbitrage. Explain specific steps that you must take to make a coveredinterest arbitrage.Spot rate CHF 0.7359/BND270-day forward rate CHF 0.7955/BND9-month Brunei interest rate 5%9-month Swiss interest rate 4%CHF Fr.= Swiss Franc.BND = Brunei Darul Salam.
company will receive €75 million in 1 year from an Italian customer. observe the following data. $:€ Spot Rate $1.25:€1.00 $:€ Forward Rate $1.30:€1.00 How many USD will you receive if you employ a forward hedge
suppose you purchased a 10 million one-year Australian dollar loan that pays 7 percent interest annually. The spot rate of U.S. dollars for Australian dollars (AUD/USD) is $0.820/A$1. What is par value of the loan in U.S. dollars?
Given CHF 3,500,000 as your capital, calculate the possible profit from covered interest arbitrage. Explain specific steps that you must take to make a coveredinterest arbitrage. CHF Fr = SwissFranc BND = Brunei Darul Salam Spot rate CHF0.7359/BND 270-day forward rate CHF 0.7359/BND 9-month Brunei interest rate 5% 9-month swiss interest rate 4% Step 1 1) Different i for Base rate -Quote rate = 2) Different between Spot and Forward = (1) + (2) = invest in _ borrow in _ Step 2 explain using table
Assume the following information: 90-day U.S. interest rate 90-day Malaysian interest rate 3% 5% 90-day forward rate of Malaysian ringgit Spot rate of Malaysian ringgit $0.394 $0.398 Assume that the Santa Barbara Co. in the United States will need 250,000 ringgit in 90 days. It wishes to hedge this payables position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for each type of hedge. Do not round intermediate calculations. Round your answers to the nearest dollar. The firm will pay out $ in 90 days if it uses the forward hedge and $ if it uses the money market hedge. Thus, it should use the -Select- hedge.
Please no written by hand solution Suppose you observe the following rates in a market. $0.80 = 1.0 euros $1.50 = 1.00 pounds 0.55 pound = 1.00 euro If you have $1 million, you will get arbitrage profits by buying a currency with $1 million, then buying another currency with the currency you bought, and lastly buying dollars with the currency you bought. The arbitrage profit with the operation will be ?
QUESTION 3 (a) KL Co. will be paying USD100,000.00 in 60 days. Assume the following interest rates: U.S. Malaysia 360-day borrowing rate 360-day deposit rate 7% 6% 5% 4% Assume the forward rate of the USD is RM4.20 and the spot rate of the USD is RM4.15. If KL Co. uses a money market hedge, how much will KL Co. be paying in 60 days?
Give typing answer with explanation and conclusion b) Mary recognises that an arbitrage opportunity exists and decides to borrow $1 million US dollars to purchase Japanese yen and sell 3-month forward to pay off US dollars denominated loan. Calculate the yen arbitrage profit from her strategy, using the data below and Japanese yen as the local currency. Show your calculations. [Hint: the strategy is for 3 months only]. Japanese Yen/US Dollar - spot currency exchange rate ¥124.30000/$1.00000 Japanese interest rate 0.50% US interest rate 3.50% Currency forward rate ¥123.26050/$1.00000
E-book Page 247 question #7 7. Covered Interest Arbitrage Assume the following information: Spot rate of Mexican peso 180-day forward rate of Mexican peso 180-day Mexican interest rate 180-day U.S. interest rate $.100 $.098 6% 5% Given this information, is covered interest arbitrage worthwhile for Mexican investors who have pesos to invest? Explain your answer.

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