0% found this document useful (0 votes)
64 views3 pages

Practice Question of International Arbitrage

1. Locational arbitrage is possible between Beal Bank and Yardley Bank based on their bid and ask prices for the New Zealand dollar. An investor could buy NZD at Yardley Bank's bid price and immediately sell it at Beal Bank's ask price, profiting from the difference. With $1 million, the profit would be $4,000. Market forces would eliminate further opportunities as banks adjust their prices. 2. Triangular arbitrage is possible based on the quoted exchange rates for CAD, NZD, and USD. An investor could buy CAD, sell it for NZD, and then sell the NZD for USD, profiting from the multiple currency exchanges. With $1 million, the profit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
64 views3 pages

Practice Question of International Arbitrage

1. Locational arbitrage is possible between Beal Bank and Yardley Bank based on their bid and ask prices for the New Zealand dollar. An investor could buy NZD at Yardley Bank's bid price and immediately sell it at Beal Bank's ask price, profiting from the difference. With $1 million, the profit would be $4,000. Market forces would eliminate further opportunities as banks adjust their prices. 2. Triangular arbitrage is possible based on the quoted exchange rates for CAD, NZD, and USD. An investor could buy CAD, sell it for NZD, and then sell the NZD for USD, profiting from the multiple currency exchanges. With $1 million, the profit
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Question No 01

Locational Arbitrage. Assume the following information:


Beal Bank Yardley Bank
Bid Price of New Zealand $ $.401 $.405
Ask Price of New Zealand $ $.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 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:

Spot rate of Canadian dollar $.80


90-day forward rate of Canadian dollar $.79
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? (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

Bid $.0224 $.0228


Ask $.0227 $.0229
Determine whether the foreign exchange quotations are appropriate. If they are not appropriate,
Determine the profit you could generate by withdrawing $100,000 from Blades’ checking
account and engaging in arbitrage before the rates are adjusted.
Question No 10
Ben Holt has obtained several forward contract quotations for the Thai baht to determine whether
Covered interest arbitrage may be possible. He was quoted a forward rate of $.0225 per Thai
baht for a 90-day forward contract. The current spot rate is $.0227. Ninety-day interest rates
available to Blades in the United States are 2 percent; while 90-day interest rates in Thailand are
3.75 percent (these rates are not annualized). Holt is aware that covered interest arbitrage, unlike
locational and triangular arbitrage, requires an investment of funds. Thus, he would like to be
able to estimate the dollar profit resulting from arbitrage over and above the dollar amount
available on a 90-day U.S. deposit. Determine whether the forward rate is priced appropriately. If
it is not priced appropriately, determine the profit you could generate for Blades by withdrawing
$100,000 from Blades’ checking account and engaging in covered interest arbitrage. Measure the
profit as the excess amount above what you could generate by investing in the U.S. money
market.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy