Assignment
The following are quotes for several US currency dealers.
|
Dealer
|
A
|
B
|
C
|
D
|
E
|
|
Singapore dollars
|
1.4168-1.4175
|
1.4162-1.4167
|
1.4161-1.4170
|
1.4168-1.4173
|
1.4170-1.4179
|
|
British pounds
|
1.2616-1.2622
|
1.2619-1.2621
|
1.2615-1.2617
|
1.2616-1.2618
|
1.2617-1.2620
|
Inter-dealer arbitrage
1a. Is there an arbitrage opportunity in Singapore dollars? If so, what exchanges should you make to take advantage of it?(Be specific about which dealer you would select, what currency you would buy from or sell to that dealer, and how much of the other currency you would pay or receive.
b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)
2a. Is there an arbitrage opportunity in British pounds? If so, what exchanges should you make to take advantage of it? (Be specific as indicated in question 1.)
b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)
Triangular arbitrage (Inter-market) - assume that the highest bid and lowest ask for each currency are equal (so that the bid-ask spread is zero)
3. In the NYcurrency market, the exchange rate for Japanese yen (USDJPY) is 113.42 and the rate for South Korean wont (USDKRW) is 1156.53. What must the quote for the won in Tokyo (JPYKRW) be if no arbitrage opportunity exists?
4a. Using the New York market spot exchange rates from the previous questions, if,in Tokyo, the exchange rate for the wonis10.2066, what trades should you make to take advantage of the arbitrage opportunity? (For each transaction, be specific about where the trade takes place, which currency you would purchase (or sell) and which currency you would use to pay (or receive).)
b. How profitable is a round trip trade? State the profitability either in percent or basis points.
5a. In the NY currency market, the exchange rate for the Saudi riyal(USDSAR)is 3.7553 and theexchange rate for the euro (EURUSD) is 1.0751. If the riyal trades in Paris (EURSAR) for 4.0337,what trades should you make to take advantage of the arbitrage opportunity? (For each transaction, be specific as indicated in question 4.)
b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)
6. In the NY currency market, the exchange rate for the Australian dollar (AUDUSD) is 0.7582 and the exchange rate for theBritish pound (GBPUSD) is 1.2654. If Australian dollars trade in London (GBP/AUD) for 1.6698, what trades should you make to take advantage of the arbitrage opportunity? (For each transaction, be specific as indicated in question 4.)
b. How profitable is a round trip trade? (State the profitability either in percent or basis points.)
Covered interest arbitrage (Inter-temporal) - assume that the highest bid and lowest ask are equal (i.e., that the bid-ask spread is zero)
7. Assume the interest rate of 1-year risk free debt denominated in US dollars is 1.04% and the interest rate on 1-year risk free debt denominated in euros is 0.85%, if today's spot market exchange rate for euros is 1.0770, what is the 1-year forward exchange rate if interest rate parity holds?
8. If the actual 1-year forward exchange rate for euros is 1.0783 and the spot market exchange rate and interest rates are as indicated in question 7, what trades should you make to take advantage of the arbitrage opportunity? Be specific about both current and future transactions (i.e., be sure to specify what currency/currencies are involved and how, and the amount of each - you can make any assumption you like about the amount of currency to start).
[Note: Immediate transactions will include: borrowing one currency at its risk free rate, exchanging it for the other currency, investing the currency received at its risk free rate, and entering a long or short forward contract to exchange the proceeds of the investment for the currency borrowed. Transactions in one year will include: closing out the investment, selling the currency received on sale of the investment at the forward price and using the proceeds to.repay the loan.]
b. How profitable is the trip trade? (State the profitability, either in dollars or euros andas a percent of initial amount borrowed.)
9. Assume the interest rate on 6-monthrisk free debt denominated in US dollars is 0.75%, the interest rate on 6-monthrisk free debt denominated in Indian rupees is 6.75%, if today's spot market exchange rate for the rupee(USDINR) is 67.34, what must the 6-month forward rate on the rupiah be if interest rate parity holds?
10a. If the 6-month forward exchange rate for the Indian rupee69.515 and the spot market exchange rate and interest rates are as indicated in question9, what trades should you make to take advantage of the arbitrage opportunity? Be specific about both current and future transactions (i.e., be sure to specify what currency/currencies are involved and how, and the amount of each - you can make any assumption you like about the amount of currency to start).
[Note: Immediate transactions will include: borrowing one currency at its risk free rate, exchanging it for the other currency, investing the currency received at its risk free rate, and entering a long or short forward contract to exchange the proceeds of the investment for the currency borrowed. Transactions in one year will include: closing out the investment, selling the currency received on sale of the investment at the forward price and using the proceeds to.repay the loan.]
b. How profitable is the trip trade? (State the profitability, either in dollars or rupees and as a percent of initial amount borrowed.)