7. (15 points) A foreign exchange trader at State Street (NYSE:STT) faces the following quotes:...
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7. (15 points) A foreign exchange trader at State Street (NYSE:STT) faces the following quotes:
Spot rate (Rs/) 130.0
6-month forward rate (Rs/) 131.0
6-month Nepalese rupee interest rate (annualized) 5.4% per year
6-month British pound interest rate (annualized) 1.4% per year
(a) The trader has a credit line to borrow up to either 100,000 or Rs13,000,000 (its rupee equivalent) at these rates for the purpose of a covered interest arbitrage (CIA). Describe every transaction the trader should make (include all relevant details) and compute the profit potential.
(b) If instead, this trader wants to implement an uncovered carry trade strategy, what transactions would they make? Calculate the profit or loss if the realized spot rates in 6 months would be Rs125.0/.
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