Suppose you are a speculator from France. You observe the following 1-year interest rates, spot exchange rates and forward prices. Forward contract sizes are $10,000 each. Exchange rate €0.6500 = $1.00 €0.6731 = $1.00 Interest rate APR So(€/S) is 3% F3so(€/S) 4% Assume you did your own calculation of the forward price based on interest rate parity (IRP). It shows that an arbitrage opportunity exists because the forward price that you calculated is: Faso(€/$) of €0.6563 = $1.00. What actions will you take to make use of the arbitrage opportunity and what will your profit be? Page 1 of 5 а. €167.89. b. €240.24. C. $70.29. d. $43.08. е. None of the above. See my workings below.
Suppose you are a speculator from France. You observe the following 1-year interest rates, spot exchange rates and forward prices. Forward contract sizes are $10,000 each. Exchange rate €0.6500 = $1.00 €0.6731 = $1.00 Interest rate APR So(€/S) is 3% F3so(€/S) 4% Assume you did your own calculation of the forward price based on interest rate parity (IRP). It shows that an arbitrage opportunity exists because the forward price that you calculated is: Faso(€/$) of €0.6563 = $1.00. What actions will you take to make use of the arbitrage opportunity and what will your profit be? Page 1 of 5 а. €167.89. b. €240.24. C. $70.29. d. $43.08. е. None of the above. See my workings below.
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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Transcribed Image Text:Suppose you are a speculator from France. You observe the following 1-year interest rates, spot
exchange rates and forward prices. Forward contract sizes are $10,000 each.
Exchange rate
€0.6500 = $1.00
€0.6731 = $1.00
Interest rate
APR
So(€/S)
is
3%
F3so(€/S)
4%
Assume you did your own calculation of the forward price based on interest rate parity (IRP). It
shows that an arbitrage opportunity exists because the forward price that you calculated is: F3so(€/S)
of €0.6563 = $1.00.
What actions will you take to make use of the arbitrage opportunity and what will your profit be?
Page 1 of 5
а.
€167.89.
b.
€240.24.
C.
$70.29.
d.
$43.08.
е.
None of the above. See my workings below.
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