As a foreign exchange trader, you are presented on your computer terminal with the following three exchange rates posted by three different banks: Bank A offers a spot rate of Indian Rupees (INR): INR 61.245-61.258/$ Bank B offers a spot rate of Danish Kroner (DKK): DKK 5.8701-5.8812/$ Bank C offers a spot rate of INR 10.3850-10.4005/DKK Note: Assume there are 360 days in a year.

 

 Required:

 i. Calculate the implied cross exchange rate between INR and DKK. (10 marks)

ii. If you have U.S. Dollar ($) 2,000 at your disposal to invest on the above currencies, show whether you can generate a profit. (10 marks)

iii. Now assume you have INR 10,000 at your disposal instead of $ 2,000, and show whether you can generate a profit. (10 marks)

iv. Explain the source of the riskless arbitrage profit opportunity. Discuss it in the context of 'buy low and sell high' principle. Explain why the market will eventually go back to a no-arbitrage condition. (where appropriate, refer to the exchange rate quotes of the three banks)

Answer rating: 100% (QA)

i To calculate the implied cross exchange rate between INR and DKK we can use the bidask spreads provided by the banks The bid price is the price at which the bank is willing to buy the currency and t... View the full answer