Ex4 F4500
Solutions: SAMPLE 2: EXAM 4: FINA 4500
Short Questions / Problems Section: (84 points)
Q1. (12 points) The table below presents bid-ask quotes for British Pounds (BP) from several currency dealers around the world.
Currency Dealer in
Zurich
Hong Kong
London
New York
Bid/Ask Quotes for BP
$1.4463-71
$1.4471-76
$1.4469-75
$1.4460-70
a) In order to take advantage of locational arbitrage, a currency speculator should:
(i) Buy BP from the New York dealer at the ask price, and
(ii) Sell BP to the Hong Kong dealer at the bid price
b) Calculate the maximum profit a currency speculator, with access to $2,500,000, can make in one round trip transaction. :
$2,500,000 / 1.4470 = BP 1,727,712.51
BP 1,727,712.51 X 1.4471 = $2,500,172.77
Profit = $2,500,172.77 - $2,500,000.00 = $ 172.77
c) If all traders try to maximize profits, then the:
(i) Hong Kong dealer’s bid price will decrease
(ii) New York dealer’s ask price will increase
Q2. (12 points) The table below presents quotes and cross-quotes on DM and SF.
Price for FF in
New York (in $)
Price for SF in
Chicago (in $)
Price for FF in
Zurich (in SF)
$ 0.225 for 1 FF
$ 0.765 for 1 SF
SF 0.355 for 1 FF
a) Please identify correctly the three steps which will create triangular arbitrage profit:
First step, convert: $ to FF ; Second step, convert: FF to SF ; Third step, convert: SF to $
b) If the speculator has access to $10,000,000, calculate the maximum profit in one triangular transaction. $10,000,000 / 0.225 = FF 44,444,444.44
FF 44,444,444.44 X 0.355 = SF 15,777,777.78
SF 15,777,777.78 X 0.765 = $ 12,070,000
Profit: $12,070,000 - 10,000,000 = $2,070,000
c) How will the prices of each dealer adjust (circle the appropriate words):
The dollar price of FF for the New York dealer will increase
The SF price of FF for the Zurich dealer will decrease
The dollar price of SF for the Chicago dealer will decrease
Q3. (20 points) Please use the exact, not the
Short Questions / Problems Section: (84 points)
Q1. (12 points) The table below presents bid-ask quotes for British Pounds (BP) from several currency dealers around the world.
Currency Dealer in
Zurich
Hong Kong
London
New York
Bid/Ask Quotes for BP
$1.4463-71
$1.4471-76
$1.4469-75
$1.4460-70
a) In order to take advantage of locational arbitrage, a currency speculator should:
(i) Buy BP from the New York dealer at the ask price, and
(ii) Sell BP to the Hong Kong dealer at the bid price
b) Calculate the maximum profit a currency speculator, with access to $2,500,000, can make in one round trip transaction. :
$2,500,000 / 1.4470 = BP 1,727,712.51
BP 1,727,712.51 X 1.4471 = $2,500,172.77
Profit = $2,500,172.77 - $2,500,000.00 = $ 172.77
c) If all traders try to maximize profits, then the:
(i) Hong Kong dealer’s bid price will decrease
(ii) New York dealer’s ask price will increase
Q2. (12 points) The table below presents quotes and cross-quotes on DM and SF.
Price for FF in
New York (in $)
Price for SF in
Chicago (in $)
Price for FF in
Zurich (in SF)
$ 0.225 for 1 FF
$ 0.765 for 1 SF
SF 0.355 for 1 FF
a) Please identify correctly the three steps which will create triangular arbitrage profit:
First step, convert: $ to FF ; Second step, convert: FF to SF ; Third step, convert: SF to $
b) If the speculator has access to $10,000,000, calculate the maximum profit in one triangular transaction. $10,000,000 / 0.225 = FF 44,444,444.44
FF 44,444,444.44 X 0.355 = SF 15,777,777.78
SF 15,777,777.78 X 0.765 = $ 12,070,000
Profit: $12,070,000 - 10,000,000 = $2,070,000
c) How will the prices of each dealer adjust (circle the appropriate words):
The dollar price of FF for the New York dealer will increase
The SF price of FF for the Zurich dealer will decrease
The dollar price of SF for the Chicago dealer will decrease
Q3. (20 points) Please use the exact, not the