a. Suppose that Bank A quotes the exchange rates as: $1.25/ Bid and $1.27/ Ask; and Bank
Question:
a. Suppose that Bank A quotes the exchange rates as: $1.25/£ Bid and $1.27/£ Ask; and Bank B quotes the FX rates: $1.28/£ Bid and $1.29/£ Ask given the same time period. Present the location arbitrate strategy and its profit. Assume that you start with £1million.
b. Suppose that the exchange rate of E£ in $ is given: SE£/$=E£4.00/$, but all other rates are the same . First show that the “triangular arbitrage” is possible. Then, present the arbitrage strategies and its profit in E£. R
c. Suppose that the forward rate of £ in $ is given: F1$/£=$1.20/£, but all other values are the same (see Slide #21). First show that the “covered interest arbitrage” is possible. Then, discuss the arbitrage strategies and its profit in $.
International Money and Finance
ISBN: 978-0123852472
8th edition
Authors: Michael Melvin, Stefan C. Norrbin