Do the following problems
1. Calculate the following cross exchange rates:
a. If the exchange rates are 200 yen per dollar and 50 US cents per Swiss Franc, what is the exchange rate of yen per franc?
b. The dollar is trading at Y100/$ and at SFr1.60/$.What is the yen per franc rate?
2. As a percentage of an arbitrary starting amount, about how large would transaction costs have to be to make arbitrage between the exchange rates SFr1.7223/$, $0.009711/Y and Y61.740/SFr unprofitable?
3. Assume the following information:
Beal Bank Yardley Bank
Bid price of New Zealand dollar $.401 $.398
Ask price of New Zealand dollar $.404 $.400
Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of locational arbitrage?
4. Assume that cross exchange rates are always proper such that triangular arbitrage is not feasible. While at the Miami airport today, you notice that a U.S. dollar can be exchanged for 125 Japanese yen, or 4 Argentine pesos at the foreign exchange booth. Last year, the Japanese yen was valued at $0.01, and the Argentine peso was valued at $.30. Based on this information, the Argentine peso has changed by what percent against the Japanese yen over the last year?
5. You obtain the following quotes from different banks. One bank is willing to buy or sell Japanese yen at an exchange rate of 110 yen per dollar. A second bank is willing to buy or sell the Argentine peso at an exchange rate of $.37 per peso. A third bank is willing to exchange Japanese yen at an exchange rate of 1 Argentine peso = 40 yen.
a. Show how you can make a profit from triangular arbitrage and what your profit would be if you had $1,000,000.
b. As investors engage in triangular arbitrage, explain the effect on each of the exchange rates until triangular arbitrage would no longer be possible.