3. Three forms of arbitrage

a. Assume the following information for New Zealand dollar.

Bank	Bid	Ask	Under/Overvalued?	Market forces
Fargo Bank	0.41	0.42
Moorhead Bank	0.39	0.40

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 to use. What market forces would occur to eliminate any further possibilities of locational arbitrage?

b. Assume the following information:

Rate	Bid	Ask	Under/Overvalued?	Market forces
EUR/USD (direct)	1.20	1.25
USD/YEN (indirect)	110	115
EUR/YEN	150	152

Make sure you notice the indirect rate. Is triangular arbitrage possible? If so, explain the steps involved in triangular arbitrage and compute the profit from this arbitrage if you had $100,000 to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage?

c. Assume the following information:

	Rate	Market forces
Spot Rate of Canadian dollar (CAD)	$0.85
1 year forward rate of CAD	0.82
1-year Canadian interest rate	5%
1-year U.S. interest rate	2%

Is covered interest arbitrage possible? If so, explain the steps involved in the arbitrage and compute the profit from this arbitrage if you had 100,000 USD or 200,000 CAD to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage?