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Excel Project 1There are two parts of this project. In the first, you will act as an agent who is speculating on currencies in attempt to earn a profit both by using derivatives and conducting a carry trade. In the second part, you will see if it is feasible to profit from conducting triangular and covered interest arbitrage.

Part 1 Section A:You buy a call option with a strike price 1/$1.3 while the current spot rate is 1/$1.2 at a premium of .08. Contracts of /$ are in denominations of 1,000 units. What would your profit be if the spot rate is 1/$1.3? How about 1/$1.45? And how about 1/$1.18?

Now what would your profits be on a put option with the same strike price (1/$1.3) given the same currency outcomes (1/$1.3, 1/$1.45, and 1/$1.18) and same premium (.08)? (show your work in excel)

Section B:You plan on conducting a carry trade with $2,000,000 based on the opportunity of differences in interest rates between the U.S. Dollar (USD) and the South African Rand (ZAR). USD has a lending rate of 4% and a borrowing rate of 6%. ZAR has a lending rate of 8% and a borrowing rate of 11%.

What would your profit be in the currency values remain the same? How about if the dollar appreciates by 2%? (show your work in excel)

Part 2 Section A:You are considering conducting triangular arbitrage given the following rates: 1/$1.3, 1/0.8, and 1/$1.4Show how you would conduct triangular arbitrage and provide the amount of potential profit if any. How do you think your answer would change if the bid-ask spread was considered?

Section B:Show how you would conduct covered interest arbitrage given the following:

You borrow $5,000,000 Canadian bank rate of 5% United States bank rate of 3% Spot rate of 1 CAD/0.8 USD Forward rate of 1 CAD/0.75 USD

What are your profits (losses)? How would your answer differ if the forward rate was 1 CAD/ 0.79 USD?

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