Q5. Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market.

Nance has the following information available on currency spot exchange rates:

§      Euros are trading at $0.9905 in New York.

§      Euros are trading at 9.8674 Mexican Pesos (MXP) in Berne.

§      U.S. Dollars are trading at 9.75 Mexican Pesos in Mexico City.

Nance is asked to determine if a profitable arbitrage opportunity exists, and if so, to determine the amount of profit in percent.

A)    Yes, a 1.3% arbitrage profit is available.

B)    Yes, a 2.18% arbitrage profit is available.

C)    Yes, a 1.2% arbitrage profit is available.

Q6. Now suppose that the 12 month forward rate between Japanese Yen and U.S. Dollars is 0.007690 $/Yen. The current spot exchange rate is 0.007556 $/Yen. The U.S. interest rate is 6.03%. Japan’s interest rate is 5.60%.

Nance has been asked to calculate the covered interest differential and determine whether a profitable arbitrage opportunity exists, and if so, how it may be achieved.

A)        −0.0231, profit by borrowing dollars and lending yen.

B)        −0.0144, profit by borrowing dollars and lending yen.

C)        +0.0227, profit by borrowing yen and lending dollars.

Q7. If 1 + the domestic interest rate < (1 + the foreign interest rate * the forward rate)/spot rate, an investor seeking arbitrage profits should borrow:

A)    foreign, convert to domestic, lend out domestic, and convert back to foreign.

B)    domestic, convert to foreign, borrow foreign, and convert back to domestic.

C)    domestic, lend out foreign, and convert back to domestic.

Thanks