Question
1. Ms. Chambers, a U.S. arbitrageur, is looking for arbitrage opportunities. The one-year interest rate offered in the U.S. is 3%, while the one-year interest
1. Ms. Chambers, a U.S. arbitrageur, is looking for arbitrage opportunities. The one-year interest rate offered in the U.S. is 3%, while the one-year interest rate offered in Bolivia is 12%. The spot rate is 7.20 BOL/USD, that is, Bolivian Pesos 7.20 per USD. Ms. Chambers is offered a one-year forward contract at 7.80 BOL/USD. Assume you have USD 500,000. . Is arbitrage possible?
a. If arbitrage is possible, design the appropriate covered arbitrage strategy.
b. If arbitrage is possible, calculate the profits for the arbitrage strategy.
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
