Question: QUESTION 2 (a) Explain Arbitrageurs. (2 marks) (b) Based on the below Bid and Ask spread for GBP/MYR, exchange MYR30,000 to GBP. Bid Ask 5.4157

QUESTION 2

(a) Explain Arbitrageurs. (2 marks)

(b) Based on the below Bid and Ask spread for GBP/MYR, exchange MYR30,000 to GBP. Bid Ask 5.4157 5.4223 (4 marks)

Currencies pair Rate The Exchange

EUR/USD 1.2000 London

EUR/CAD 1.5400 London

USD/CAD 1.2539 New York

i. Determine any arbitrage opportunity. (4 marks)

ii. Calculate the profit/ (loss) from the above triangular arbitrage assuming your investment start with USD500,000. (8 marks)

iii. Conclude from your answer in (ii) above. (2 marks) 2 Question (a) Explain Purchasing Power Parity. (2 marks)

(b) Discuss why absolute Purchasing Power Parity will not hold. (4 marks)

(c) The below table compare the price of one product, named Product X, in United State of America and Norway. Price of product X in United States (USD) Price of product X in Norway (Norwegian Krone) Actual Interest Rate $10.00 kr110.00 USD / NOK = 9.04

i. Determine if Product X in both countries being priced equally. (4 marks)

ii. Is product X in Norway undervalued or overvalued? (2 marks)

iii. Calculate the implied Purchasing Power Parity (PPP) rate of exchange based on the two product prices. (4 marks)

iv. Based on the implied PPP, calculate the percentage of product X in Norway being undervalued or overvalued. (4 marks)

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