Practice Question of International Arbitrage
Practice Question of International Arbitrage
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 million to use. What
market forces would occur to eliminate any further possibilities of locational arbitrage?
Question No 02
Triangular Arbitrage. Assume the following information:
Quoted Price
Value of Canadian $ in U S $ $.90
Value of New Zealand $ in U S $ $.30
Value of Canadian $ in New Zealand $ NZ$3.02
Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect
triangular arbitrage, and compute the profit from this strategy if you had $1 million to use. What
market forces would occur to eliminate any further possibilities of triangular arbitrage?
Question No 03
Covered Interest Arbitrage. Assume the following information:
Given this information, what would be the yield (percentage return) to a U.S. investor who used
covered interest arbitrage? (Assume the investor invests $1 million.) What market forces would
occur to eliminate any further possibilities of covered interest arbitrage?
Question No 04
Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal,
you notice that Dresdner Bank is quoting €0.7627/$1.00 and Credit Suisse is offering
SF1.1806/$1.00. You learn that UBS is making a direct market between the Swiss franc and the
euro, with a current €/SF quote of .6395. 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 €/SF price will eliminate triangular arbitrage?
Question No 05
Assume the following exchange rates and one-year interest rates
BID RATE ASK RATE
Euro Spot $1.12 $1.13
Euro one-year forward $1.12 $1.13
Deposit Rate Loan Rate
Interest rate on dollars 6.0% 9.0%
Interest rate on Euros 6.5% 9.5%
You have $200,000 to invest for one year. Would you benefit from engaging in covered interest
arbitrage?
Question No 06
Assume the following information:
You have $800,000 to invest
Spot rate of Canadian dollar = $1.60
90-day forward rate of Canadian dollar = $1.60
90-day Canadian Interest rate = 4%
90-day U.S interest rate = 2.5%
Given this information, what would be the yield (percentage return) to a U.S investor who used
covered interest arbitrage?
Question No 07
Assume the following exchange rates
Bid Quote Ask Quote
Value of British pound in U.S $1.61
dollars
Value of Malaysian ringgit $.201
(MYR) in U.S dollars
Value of British pound in MYR 8.20
Malaysian ringgit (MYR)
You have $1000, 000 to invest for one year. Would you benefit from engaging in Triangular
arbitrage?
Question No 08
The first arbitrage opportunity relates to locational arbitrage. Holt has obtained spot rate
quotations from two banks in Thailand: Minzu Bank and Sobat Bank both located in Bangkok.
The bid and ask prices of Thai baht for each bank are displayed in the table below:
Minzu Bank Sobat Bank