One-year forward rate of £1= A$.71 One-year U.S. interest rate = 8.00% One year British interest rate = 9.09% One-year Australian interest rate = 7.00% Question 1 Determining whether triangular arbitrage is feasible and‚ if so how it should be conducted to make a profit. Background: Triangular arbitrage is used to capitalize on a discrepancy that might exist in the exchange rates between two currencies whose transactions are conducted in the spot market. i) Developing the cross exchange
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the market bid-ask spread in order to sell CD and thus lower his inventory of CD. 9. What is-’triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity? Triangular arbitrage is the process of trading out of the U.S. dollar into a second currency‚ then trading it for a third currency‚ which is in turn traded for U.S. dollars. The purpose is to earn an arbitrage profit via trading from the second to the third currency when the direct exchange rate between
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Chapter 7 2. Locational Arbitrage. 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? ANS: Yes. One
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Swiss franc and the euro‚ with a current €/CHF quote of 0‚6750. Show how you can make a triangular arbitrage profit by trading at these prices (ignore bid-ask spreads for this problem). Assume you have $5.000.000 with which to conduct the arbitrage. What happens if you initially sell dollars for Swiss francs? What €/CHF price will eliminate triangular arbitrage? In order to make a triangular arbitrage profit I should sell $5.000.000 to Dresdner Bank‚ which is quoting €1‚0242/$1. In this trade
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INSTRUCTOR’S MANUAL: MULTINATIONAL FINANCIAL MANAGEMENT‚ 9TH ED. CHAPTER 7 SUGGESTED ANSWERS TO CHAPTER 7 QUESTIONS 1. Answer the following questions based on data in Exhibit 7.5. a. How many Swiss francs can you get for one dollar? ANSWER. The indirect quote is $1 = SFr 1.0534. b. How many dollars can you get for one Swiss franc? ANSWER. The direct quote is SFr1 = $0.9493. c. What is the three-month forward rate for the Swiss franc? ANSWER. The three-month forward
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prevent triangular arbitrage‚ the direct quote of the yen price of the baht (¥/THB) must equal the yen price of the dollar times the dollar price of the baht (which is the reciprocal of the baht price of the dollar: ¥104.30/$ 1/(THB25.15/$) = ¥104.30/$ $0.03976/THB = ¥ 4.1471/THB 3. As a foreign exchange trader‚ you see the following quotes for Canadian dollars (CAD)‚ U.S. dollars (USD)‚ and Mexican pesos (MXN): CAD1.419/USD MXN6.4390/CAD MXN8.7535/USD Is there an arbitrage opportunity
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Chapter 4 2. Inflation Effects on Exchange Rates. Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal‚ how should this affect the (a) U.S. demand for Canadian dollars‚ (b) supply of Canadian dollars for sale‚ and (c) equilibrium value of the Canadian dollar? ANSWER: Demand for Canadian dollars should increase‚ supply of Canadian dollars for sale should decrease‚ and the Canadian dollar’s value should increase. 3. Interest Rate Effects on
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The Chinese University of Hong Kong CUHK Business School FINA3020 International Finance Assignment 1 Question 1 Hang Seng Bank quotes bid-ask rates of USD/EUR 1.3005 – 1.3007 and JPY/USD 104.30 – 104.40. What would be Hang Seng Bank’s direct asking price of JPY/EUR? The cross-rate of JPY/EUR can be achieved by: JPY JPY USD EUR USD EUR The synthetic ask is the highest product: / EUR /USD / EUR Synthetic StJPY StJPY StUSD ‚ ask ‚ ask ‚ ask 104.40 1.3007 135.7931 Question 2 A bank
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international issues may also be greatly affected by the exchange rate‚ taxes‚ and arbitrage. It may also be more of a challenge to manage
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CHAPTER 6 Fixed Exchange Rate System In a fixed exchange rate system‚ exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries. A fixed exchange rate would be beneficial to a country for the following reasons. First‚ exporters and importers could engage in international trade without concern about exchange rate movements of the currency to which their local currency is linked. Any firms that accept the foreign currency as payment would be insulated from
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