1)(4 pts) Locational Arbitrage. Assume the following information:

Beal Bank Yardley Bank

Bid price of New Zealand dollar $.401 $.398

Ask price of New Zealand dollar $.404 $.400

Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of locational arbitrage?

2)(5 pts) Triangular Arbitrage. Assume the following information:

Quoted Price

Value of Canadian dollar in U.S. dollars $.90

Value of New Zealand dollar in U.S. dollars $.30

Value of Canadian dollar in New Zealand dollars NZ$3.02

Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage?

3)(6 pts) Covered Interest Arbitrage. Assume the following information:

Quoted Price

Spot rate of Canadian dollar $.80

90day forward rate of Canadian dollar $.79

90day Canadian interest rate 4%

90day U.S. interest rate 2.5%

Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?

4)(5 pts) Covered Interest Arbitrage in Both Directions. The oneyear interest rate in New Zealand is 6 percent. The oneyear U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZ$) is $.50. The forward rate of the New Zealand dollar is $.54. Is covered interest arbitrage feasible for U.S. investors? Is it feasible for New Zealand investors? In each case, explain why covered interest arbitrage is or is not feasible.

5)(5 pts) Covered Interest Arbitrage in Both Directions. The following information is available:

You have $500,000 to invest

The current spot rate of the Moroccan dirham is $.110.

The 60-day forward rate of the Moroccan dirham is $.108.

The 60-day interest rate in the U.S. is 1 percent.

The 60-day interest rate in Morocco is 2 percent.

a.What is the yield to a U.S. investor who conducts covered interest arbitrage? Did covered interest arbitrage work for the investor in this case?

b.Would covered interest arbitrage be possible for a Moroccan investor in this case?

6) (4 pts) Assume the following information:

Current spot rate of Euro = $1.4175/1 Euro

1-year forward rate of pound = $1.4246/1 Euro

1-Year deposit rate in U.S. = 2.6% per year

1-Year deposit rate in Europe = 1.4% per year

I)From a graphical analysis viewpoint of the Interest Rate Parity Condition, does this situation

a.Lie above the IRP Line

b.Lie on the IRP Line

c.Lie below the IRP Line

Pick either A, B or C:__________

II)If the above situation who (if anyone) would benefit from covered interest arbitrage for a 1-year investment,

a.European Investors can earn a higher return from covered interest arbitrage compared to investing locally (Investing locally is a European Investor depositing money in European Bank)

b.Neither European nor US Investors

c.US Investors can earn a higher return from covered interest arbitrage compared to investing locally (US Investor depositing money in US Bank)

Pick either A, B or C:__________

7) (6 pts) World Nation Bank offers the following information (ignore bid/ask spreads):

Spot rate on Pound = $1.69 (US$1.69 / 1GBP)

180 day forward rate on Pound = $1.72 (US$1.72 / 1 GBP)

Customers can borrow or deposit US dollars for 180 days at 6% per year (3% per 180 days)

Customers can borrow or deposit Pounds for 180 days at 4.4% per year(2.2% per 180 days)

a)Suppose a US customer has $100,000, if he deposits the $100,000 in World National bank he will have $103,000 at the end of 180 days.If he uses covered interest arbitrage, how many US dollars will he have at the end of 180 days?

US dollars from covered interest arbitrage = ___________________

b)Suppose a British customer has 100,000 Pounds, if she deposits the 100,000 Pounds in World National bank she will have 102,000 Pounds at the end of 180 days.If she uses covered interest arbitrage, how many Pounds will she have at the end of 180 days?

Pounds from covered interest arbitrage = _______________________