An arbitrager at Deutsche Bank notices that the yield on Brazilian Real 6-month risk-free bills is 5.5%
Question:
a) Given the above quotes, compare the covered yield in BRL with the nominal yield in dollar and infer whether a covered interest arbitrage opportunity exists and what does it imply for funds flow due to arbitrage.
b) What transactions will the arbitrageur undertake to realize arbitrage profits in dollars net of transaction cost? Write all the steps clearly and show your calculations in each step. Assume that the bank has allowed a transaction size of $10 million or its BRL equivalent at the current spot rate. Also assume that the transaction cost is 0.2% of the transaction size to be deducted from the gross arbitrage profits at the end of 6-month period.
c) Suppose the nominal interest rates stay at the levels quoted above, what should be the no-arbitrage annualized forward premium/discount on BRL against $?
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
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Related Book For
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott
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