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[answered] Module * Study Questions Locational Arbitrage. Assume the f

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Module * Study Questions

Locational Arbitrage. Assume the following information: Bid price of New Zealand dollar Beal

Bank $.401 Yardley Bank $.398. Ask price of New Zealand dollar Beal Bank $.404 Yardley

Bank $.400. Given this information, is locational arbitrage possible?

Ye

s

No

Compute the profit from this arbitrage if you had $1,000,000 to use. Bid price of New

Zealand dollar Beal Bank $.401 Yardley Bank $.398. Ask price of New Zealand dollar Beal

Bank $.404 Yardley Bank $.400. $2,785

$2,500

$2,170

Changes in Forward Premiums. Assume that the forward rate premium of the euro was

higher last month than it is today. What does this imply about interest rate differentials

between the United States and Europe today compared to those last month?

The interest rate differential is smaller now than it was last

month.

The interest rate differential provides an arbitrage opportunity

to USD holders.

The interest rate differential is higher than it was last month.

The interest rate differential provides an arbitrage opportunity

to euro holders.

Covered Interest Arbitrage. Assume the following information: Quoted Price: Spot rate of

Canadian dollar: $.80. 90 day forward rate of Canadian dollar: $.79. 90 day Canadian

interest rate: 4%. 90 day U.S. interest rate: 2.5%. Given this information, assume the

investor invests $1,000,000. What is the profit from this covered interest arbitrage?

$130,00

0

$1,027,0

00

$1,367,0

00

Covered Interest Arbitrage. Assume the following information: Quoted Price: Spot rate of

Canadian dollar: $.80. 90 day forward rate of Canadian dollar: $.79. 90 day Canadian

interest rate: 4%. 90 day U.S. interest rate: 2.5%. What would be the yield (percentage

return) to a U.S. investor who used covered interest arbitrage?

2.7

%

2.1

%

1.5

%

Covered Interest Arbitrage. Assume the following information: Quoted Price: Spot rate of

Canadian dollar: $.80. 90 day forward rate of Canadian dollar: $.79. 90 day Canadian

interest rate: 4%. 90 day U.S. interest rate: 2.5%. What market forces would occur to

eliminate any further possibilities of covered interest arbitrage? Rise,

fall

Fall,

rise

Rise,

rise

Fall,

fall

Covered Interest Arbitrage in Both Directions. Assume that the existing U.S. one year

interest rate is 10% and the Canadian one year interest rate is 11%. Also assume that

interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount

or a premium?

Discou

nt

Premiu

m

Interest Rate Parity. Consider investors who invest in either U.S. or British one year Treasury

bills. Assume zero transaction costs and no taxes. If interest rate parity exists, then the

return for U.S. investors who use covered interest arbitrage will be the same as the return

for U.S. investors who invest in U.S. Treasury bills. Is this statement true or false?

True

False Covered Interest Arbitrage in Both Directions. The one year interest rate in New Zealand is

6%. The one year U.S. interest rate is 10%. The spot rate of the New Zealand dollar (NZ$) is

$.50. The forward rate of the New Zealand dollar is $.54. What is the yield from covered

interest arbitrage for U.S. investors? Is covered interest arbitrage feasible for U.S. investors?

14.48%,

yes

14.48%,

no

11.79%,

yes

11.79%,

no

Triangular Arbitrage. Assume the following information: Quoted Price: Value of Canadian

dollar in U.S. dollars: $.90. Value of New Zealand dollar in U.S. dollars: $.30. Value of

Canadian dollar in New Zealand dollars: NZ$3.02. Given this information, is triangular

arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and

compute the profit from this strategy if you had $1,000,000 to use. What market forces

would occur to eliminate any further possibilities of triangular arbitrage?

$8,4

37

$7,5

89

$6,6

67 $5,4

50

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