In a recent e-news, you observe that the 6-month forward rate is $1.5031 / Euro. Further, if you invest the dollar, it fetches you interest at the rate of 2% p.a. In comparison, the interest rate in Eurozone is 1% p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD 1.332 are needed to buy a US$. Is it possible for you to make an arbitrage profit? If so, which of the arbitrage strategies will you employ and what will be the profit? Assume that interest rate parity holds, and you have one million dollars available to conduct arbitrage. Do I have to do cross multiplication of currency for this question?
In a recent e-news, you observe that the 6-month forward rate is $1.5031 / Euro. Further, if you invest the dollar, it fetches you interest at the rate of 2% p.a. In comparison, the interest rate in Eurozone is 1% p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD 1.332 are needed to buy a US$. Is it possible for you to make an arbitrage profit? If so, which of the arbitrage strategies will you employ and what will be the profit? Assume that interest rate parity holds, and you have one million dollars available to conduct arbitrage. Do I have to do cross multiplication of currency for this question?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
In a recent e-news, you observe that the 6-month forward rate is $1.5031
/ Euro. Further, if you invest the dollar, it fetches you interest at
the rate of 2% p.a. In comparison, the interest rate in Eurozone is 1%
p.a. You also see that CAD 1.5513 are needed to purchase a Euro and CAD
1.332 are needed to buy a US$. Is it possible for you to make an arbitrage
profit? If so, which of the arbitrage strategies will you employ and
what will be the profit? Assume that interest rate parity holds, and you
have one million dollars available to conduct arbitrage.
Do I have to do cross multiplication of currency for this question?
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