A Foreign currency trader at the banks FX desk calls to inform you that Bank of America
Question:
A Foreign currency trader at the bank’s FX desk calls to inform you that Bank of America is quoting $1.12/€1, and Citibank is offering $1.28/£1. The trader also noticed that Credit Agricole is making market in pound sterling and Euro at €1.18/£1.
a. What is the implied €/£ cross-rate for the two European currencies? Show this trader how you would use $1 million to conduct a triangular arbitrage to profit from the deviation (if any) of the implied cross rate of the €/£, from the rate quoted by Credit Agricole.
b. Suppose you observed that the 3-month forward rate quote from Bank of America is $1.21/€1, calculate the forward premium (discount) implied by the quote.
c. What do investors expect to happen to the value dollar in the next three months?
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain