You're a FX trader working in Mexico. You have decided not to bear transaction foreign exchange...

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You're a FX trader working in Mexico. You have decided not to bear transaction foreign exchange risk. The required information is as follows: Spot rate (MXN/£) 180-day Forward rate (MXN/£) Peso interest rate % p.a. Pound interest rate % p.a. Bid 29.202 30.956 3.00 1.04 Ask b. Which one provides the higher peso return in 180 days? (1 mark) 29.230 30.982 3.06 1.10 Required: a. You are considering two alternative investments of MXN 10,000 in the 180-day Mexican peso deposits or 180-day U.K. pound deposits. Calculate the MXN return for both deposits (domestic vs. foreign money market). You must show your workings with a step-by-step approach. (4 marks) c. Based on the answers from (a) and (b), which arbitrage strategy should you take? i.e. inward or outward arbitrage? (1 mark) d. i) Using a box diagram that represents covered interest arbitrage (a rectangular arbitrage that we have drawn with arrows in the tutorials), demonstrate how you can make arbitrage profit with a step-by-step approach. You MUST choose the correct bid or ask price for each transaction. Please start with 10,000 units of currency and use 4 decimal points. (6 marks) ii) What is the rate of return that you can make from the arbitrage profit? (1 mark) Hint: There are nodes in each corner of the square box. There are four arrows and each arrow indicates the steps required to show the process of arbitrage. Choose the correct direction (clockwise or anti-clockwise) of arrows to reflect the arbitrage strategy you have chosen in the question (c). You're a FX trader working in Mexico. You have decided not to bear transaction foreign exchange risk. The required information is as follows: Spot rate (MXN/£) 180-day Forward rate (MXN/£) Peso interest rate % p.a. Pound interest rate % p.a. Bid 29.202 30.956 3.00 1.04 Ask b. Which one provides the higher peso return in 180 days? (1 mark) 29.230 30.982 3.06 1.10 Required: a. You are considering two alternative investments of MXN 10,000 in the 180-day Mexican peso deposits or 180-day U.K. pound deposits. Calculate the MXN return for both deposits (domestic vs. foreign money market). You must show your workings with a step-by-step approach. (4 marks) c. Based on the answers from (a) and (b), which arbitrage strategy should you take? i.e. inward or outward arbitrage? (1 mark) d. i) Using a box diagram that represents covered interest arbitrage (a rectangular arbitrage that we have drawn with arrows in the tutorials), demonstrate how you can make arbitrage profit with a step-by-step approach. You MUST choose the correct bid or ask price for each transaction. Please start with 10,000 units of currency and use 4 decimal points. (6 marks) ii) What is the rate of return that you can make from the arbitrage profit? (1 mark) Hint: There are nodes in each corner of the square box. There are four arrows and each arrow indicates the steps required to show the process of arbitrage. Choose the correct direction (clockwise or anti-clockwise) of arrows to reflect the arbitrage strategy you have chosen in the question (c).

Answer rating: 100% (QA)

a MXN return for 180day Mexican peso deposits Interest MXN 10000 x 300100 x 180360 MXN 150 Total MXN ... View the full answer