A market trader is offering a $500m loan agreement in 3 months, for a period of 3 months on the following terms: 3 3/4% − 3 7/8%. Using the information provided in Questions 1 and 2, can you identify an arbitrage opportunity? What is the potential gain for the arbitrageur?

Questions 1

Calculate the future buy and sell price, at 3 months (dollar against euro) using the following information:

◦ the 3-month euro rate is equal to 4 6/8 − 4 7/8%;

◦ the 3-month dollar rate is equal to 3 7/8 – 4 %;

◦ the euro is currently trading at $1.0210/20.

Questions 2

Calculate the 6-month interest rate of the dollar on the basis of the following information:

◦ the 6-month euro rate is equal to 4 4/8 − 4 5/8%;

◦ the euro is currently trading at $1.0210/20;

◦ the euro is trading at 6 months at $1.0150/60.