Arbitrage, hedging, and speculation are three different strategies in the trading world, and they can be...

 

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Arbitrage, hedging, and speculation are three different strategies in the trading world, and they can be practised in the marketplace to combine calculated risk with risk-free profits. The probability of bringing all these concepts under one umbrella in the foreign exchange markets is wider than in other financial markets. Many studies attempt to design a structure within which the trader shows how he can employ arbitrage, hedging, and speculation to capture any profitable opportunities. Required: (a) Comment on the words "arbitrage profits". Discuss this in the context of the foreign exchange markets with an example. (b) Suppose the Japanese Yen exchange rate is ¥106 = $1, and the British Pound exchange rate is £1 = $1.39. i. What is the cross-rate in terms of Yen per Pound? ii. Assume that the cross-rate is 145 = £1 in the currency market. Is there an arbitrage opportunity here? If yes, justify how to take advantage of this mispricing. (6 marks) (3 marks) (11 marks) Digital travel services giant Qunar went private in a merger with Ocean Management Holdings, a deal that the Nasdaq-listed Chinese company puts its value at US$4.4 billion. The transaction signaled the second major Chinese online travel company trading on the Nasdaq stock market to be targeted for privatisation in 2016, following eLong's merger with China E-Dragon Holdings in June 2016. In December 2015, little-known Baoneng's subsidiary Foresea Life Insurance joined hand with China Resources as Vanke's largest shareholder. Baoneng has a real-estate arm of its own, and around 40 other subsidiaries. However, it used Foresea and another insurance affiliate to take a 25% stake in Vanke. Vanke management regarded Baoneng's move as a "hostile takeover," which was highly unusual in China. Vanke was founded by Wang Shi who was an entrepreneur. He chose to become a professional manager by giving up his ownership stake when the company went public in 1991. Required: (a) Appraise the reasons behind Chinese online travel companies' decision to go private. (b) Discuss three defensive tactics against a hostile takeover. (10 marks) (10 marks) Arbitrage, hedging, and speculation are three different strategies in the trading world, and they can be practised in the marketplace to combine calculated risk with risk-free profits. The probability of bringing all these concepts under one umbrella in the foreign exchange markets is wider than in other financial markets. Many studies attempt to design a structure within which the trader shows how he can employ arbitrage, hedging, and speculation to capture any profitable opportunities. Required: (a) Comment on the words "arbitrage profits". Discuss this in the context of the foreign exchange markets with an example. (b) Suppose the Japanese Yen exchange rate is ¥106 = $1, and the British Pound exchange rate is £1 = $1.39. i. What is the cross-rate in terms of Yen per Pound? ii. Assume that the cross-rate is 145 = £1 in the currency market. Is there an arbitrage opportunity here? If yes, justify how to take advantage of this mispricing. (6 marks) (3 marks) (11 marks) Digital travel services giant Qunar went private in a merger with Ocean Management Holdings, a deal that the Nasdaq-listed Chinese company puts its value at US$4.4 billion. The transaction signaled the second major Chinese online travel company trading on the Nasdaq stock market to be targeted for privatisation in 2016, following eLong's merger with China E-Dragon Holdings in June 2016. In December 2015, little-known Baoneng's subsidiary Foresea Life Insurance joined hand with China Resources as Vanke's largest shareholder. Baoneng has a real-estate arm of its own, and around 40 other subsidiaries. However, it used Foresea and another insurance affiliate to take a 25% stake in Vanke. Vanke management regarded Baoneng's move as a "hostile takeover," which was highly unusual in China. Vanke was founded by Wang Shi who was an entrepreneur. He chose to become a professional manager by giving up his ownership stake when the company went public in 1991. Required: (a) Appraise the reasons behind Chinese online travel companies' decision to go private. (b) Discuss three defensive tactics against a hostile takeover. (10 marks) (10 marks)

Answer rating: 100% (QA)

Part a Arbitrage in Foreign Exchange Markets Example Given exchange rates USDJPY 106 GBPUSD 139 Calculate the crossrate JPYGBP CrossRate JPYGBPUSDJPYGBPUSD CrossRate JPYGBP106139 CrossRate JPYGBP7626 ... View the full answer