土豆妮

The annual interest rates in England and New Zealand are 6.54% and 7.03%, respectively. The one-year forward exchange rate between the British pound and the New Zealand dollar is 0.45 GBP/NZD and the spot rate is 0.41 GBP/NZD. If a person living in London can borrow 10,000 pounds or the equivalent amount in New Zealand dollars, how much arbitrage profit, if any, can he make?

A) 1,043.61 GBP.

B) 1,124.88 GBP.

C) 1,093.20 GBP.

土豆妮

The annual interest rates in England and New Zealand are 6.54% and 7.03%, respectively. The one-year forward exchange rate between the British pound and the New Zealand dollar is 0.45 GBP/NZD and the spot rate is 0.41 GBP/NZD. If a person living in London can borrow 10,000 pounds or the equivalent amount in New Zealand dollars, how much arbitrage profit, if any, can he make?

A) 1,043.61 GBP.

B) 1,124.88 GBP.

C) 1,093.20 GBP.

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Borrow 10,000 GBP at 6.54% = 654 GBP interest due at the end of the year.
Convert to NZD: (10,000 GBP) × (1 NZD/0.41 GBP) = 24,390 NZD.
Lend out NZD at 7.03% interest: (24,390 NZD) × (1.0703) = 26,104.88 NZD.
Convert back to GBP: (26,104.88 NZD) × (0.45 GBP/NZD) = 11,747.20 GBP.
11,747.20 GBP ? 10,000 GBP (original amount borrowed) ? 654 GBP interest = 1,093.20 GBP profit.

土豆妮

The forward rate between the Mexican peso and the U.S. dollar is 556.75 MXN/USD and the spot rate is 581.23 MXN/USD. The Mexican interest rate is 5.89%, and the U.S. rate is 5.75%. If a person lives in Mexico and can borrow $10,000 or the equivalent in pesos, how much can she make if currency arbitrage opportunities exist?

A) $479.59.

B) $459.39.

C) Arbitrage opportunities do not exist.

土豆妮

The forward rate between the Mexican peso and the U.S. dollar is 556.75 MXN/USD and the spot rate is 581.23 MXN/USD. The Mexican interest rate is 5.89%, and the U.S. rate is 5.75%. If a person lives in Mexico and can borrow $10,000 or the equivalent in pesos, how much can she make if currency arbitrage opportunities exist?

A) $479.59.

B) $459.39.

C) Arbitrage opportunities do not exist.

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First determine if arbitrage opportunities exist by using the following equation:

if 1 + r_D > [(1 + r_F)(Forward rate)] / Spot rate, then borrow foreign (dollars).

1.0589 > [(1.0575)(556.75)] / 581.23

1.0589 > 588.763 / 581.23

1.0589 > 1.01296, therefore, borrow foreign (dollars).

Borrow $10,000 at 5.75%, interest = $575 due at the end of the year. Convert to pesos using the spot rate: ($10,000) × (581.23 MXN/USD) = 5,812,300 pesos.

Lend out at 5.89%: (5,812,300 pesos) × (1.0589) = 6,154,644.47 pesos. Convert to dollars: (6,154,644.47 MXN) × (USD/556.75 MXN) = $11,054.59. $11,054.59 ? $10,000 (original amount borrowed) ? $575 (interest) = $479.59 profit.

土豆妮

The spot rate between the Canadian dollar and the British pound is 1.265 CAD/? and the forward rate is 1.193 CAD/?. The interest rate in Canada and England are 6.13% and 6.01%, respectively. A person living in Toronto, Canada can borrow either Canadian dollars or pounds. If an arbitrage opportunity exists, which currency would they lend or borrow?

A) Borrow pounds.

B) Lend pounds.

C) Borrow Canadian dollars.

土豆妮

The spot rate between the Canadian dollar and the British pound is 1.265 CAD/? and the forward rate is 1.193 CAD/?. The interest rate in Canada and England are 6.13% and 6.01%, respectively. A person living in Toronto, Canada can borrow either Canadian dollars or pounds. If an arbitrage opportunity exists, which currency would they lend or borrow?

A) Borrow pounds.

B) Lend pounds.

C) Borrow Canadian dollars.

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Use the following formula to determine if an arbitrage opportunity exists and which currency to borrow.

if 1 + r_D > [(1 + r_F)(Forward rate)] / Spot rate, then borrow foreign.

1.0613 > [(1.0601)(1.193)] / 1.265

1.0613 > 1.265 / 1.265

1.0613 > 1 therefore borrow foreign (British pound) and lend domestic (Canadian dollar).

luqian55

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annyyu

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