21. forward rate between Swiss francs and U.S. dollars is 1.8 SF/$ and the current spot rate is 1.90 SF/$. The Swiss interest rate is 8.02% and the U.S. rate is 11.02%. Assume you can borrow francs or dollars and you live in Switzerland. If an arbitrage opportunity exists, how can you take advantage of it? A) Borrow domestic currency. B) No arbitrage opportunity exists. C) Borrow foreign currency. D) Lend foreign currency. The correct answer was C) Borrow foreign if 1 + rD> [(1 + rF)(forward rate)]/spot rate 1 + 0.0802 > [(1 + 0.1102)(1.8)]/1.9 1.0802 > 1.99836/1.9 1.0802 > 1.0518 therefore borrow foreign (dollars) and lend domestic (francs). Alternatively, U.S. rate is 11.02 - 8.02 = 3% higher and USD is at (1.8 - 1.9)/1.9 = 5.3% discount since USD will fall more than the extra 3% interest, better to lend francs. 22.ume an investor living in Mauritius can borrow in $ or in Mauritius Rupee (MUR). Given the following information, determine whether an arbitrage opportunity exists. If so, how much would the arbitrageur profit by borrowing MUR 1,000,000 or the equivalent in $? (Assume a period of one year and state the profit in domestic currency terms.) Spot rate (MUR/$) | 30.73000 | Forward rate (MUR/$) | 31.50000 | Domestic (MUR) interest rate (%) | 6.50% | Foreign ($) interest rate (%) | 5.20% |
Which of the following is closest to the correct answer? A) Borrow $. Arbitrage profits are $13,340. B) Borrow MUR. Arbitrage profits are MUR 13,340. C) There are no arbitrage profits. D) Borrow domestic. Arbitrage profits are $39,685. The correct answer was B) Step 1:
Determine whether an arbitrage opportunity exists. §
We can arrange the formula for covered interest rate parity (CIP) to look like: (1 + rdomestic) - [((1 + rforeign) * ForwardDC/FC) / SpotDC/FC] = 0 §
If this condition holds with the financial data above, there are no arbitrage opportunities: (1 + 0.06500) - [((1 + 0.05200) * 31.5000) / 30.73000] = 1.06500 - 1.07836 = -0.01336
§
Since the no arbitrage condition does not hold, we move on to: Step 2:
Borrow Domestic or Foreign? §
Rule 1: If the sign on the result of Step 1 is negative, borrow domestic. If the sign is positive, borrow foreign. Here, the sign is negative, so borrow domestic. §
Rule 2: See table below. (Rule 2 is an alternative to Rule 1). (rd – rf) < (Forward – Spot) / Spot | Borrow Domestic | (rd – rf) > (Forward – Spot) / Spot | Borrow Foreign |
Here, (0.06500 – 0.05200) compared to (31.5000 – 30.73000) / 30.73000 0.013000 < 0.02506, borrow domestic. Step 3: Conduct Arbitrage and Calculate Profits. Step | Description | Rate | Calculation | Result | a | Borrow Domestic |
| MUR 1,000,000 | MUR 1,000,000 | b | Exchange MUR for $ | Spot | = MUR 1,000,000 / 30.73000 MUR/$ | $ 32,541 | c | Lend $ at Foreign (U.S.) Rate |
| = $ 32,541 * (1.05200) | $ 34,233 | d | Contract to sell proceeds fwd1 | Fwd | = $ 34,233 * 31.50000 MUR/$ | MUR 1,078,340 | e | Calculate loan payoff2 |
| = MUR 1,000,000 * (1.06500) | MUR 1,065,000 | f | Calculate profit (d-e) |
|
| MUR 13,340 |
Note: 1 This is the amount you will have available to repay the loan. 2 This is the amount you need to repay. | 
发表于 2008-5-12 14:28
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