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You are a currency arbitrageur, use the following data to make a 180-day CIA recommendation...

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Finance

You are a currency arbitrageur, use the following data to make a 180-day CIA recommendation (assume that the borrowing and investing rates are identical, that the bid-ask spread in the foreign exchange markets is zero and that there are no transactions costs). 10 marks

Data:

  • Home: Canada;
  • Available funds: CAD 5,000,000 or equivalent in EUR
  • Spot: 1.48 CAD/EUR;
  • Annual T-Bill rate: Canada 4%; Euro: 1%
  • Forward 180-day: 1.52 CAD/EUR
  1. Show how you can determine if there is a profitable arbitrage opportunity.
  2. Calculate the forward premium or discount and use the arbitrage rules of thumb to decide your CIA strategy
  3. Represent your CIA strategy in a diagram showing the currency exchanges, borrowing, and investing flows, and show all calculations. Clearly state the arbitrage profit (round your final answer to the dollar, no decimals).

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