Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. suppose you obtain the following quotes: foreign e

Suppose you obtain the following quotes: Foreign exchange market: Spot rate: EUS$/G =1.0823 ...

70.2K

Verified Solution

Question

Finance

Suppose you obtain the following quotes:
Foreign exchange market: Spot rate:
EUS$/G =1.0823
30-day Forward rate:
FUS$lon30=1.0835
Money market (30-day):
RUSS=5.4% p.a.
Rlon=4.8% p.a.
a) Based on the above information, is there any arbitrage opportunity? If yes, what should the
commercial bank do to capture this arbitrage opportunity? If not, why? Explain.
b) Suppose your firm can move the markets (i.e., change the spot exchange rate, the forward exchange
rate, and the corporate bond rates in both countries), what happens to these four terms after the
transactions you perform in part (a)? Explain in words.
c) Instead of affecting the interest rates and the 30-day forward rate, suppose the spot exchange rate
bears all the burden of adjustments, find the US $ spot rate that would eliminate interest arbitrage.
image

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students