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a Arbitrage is a key concept in financial mathematics. In this project, you are expected to consider some financial trading opportunities and identify, from the
a Arbitrage is a key concept in financial mathematics. In this project, you are expected to consider some financial trading opportunities and identify, from the given data set, a mispricing that can lead in turn to an arbitrage opportunity. Then you will have to report a corresponding arbitrage strategy for returning a risk-free profit and estimate the magnitude for the expected profit, both in written and in oral form. 3 Data A trader has access to the following four investment opportunities. One of them features a significant misprice that needs to be identified. Once identified, an arbitrage strategy can be devised to make a risk-free profit (see below for further guidance). The trader also has access to bonds at the UK market interest rate at 0.67%. Opportunity 1: Currency trading On a currency market, the following currency exchange rates are listed. GBP USD EUR CHF 1 GBP = 1.0000 1.2689 1.1567 1.3299 1 USD = 0.7881 1.0000 0.9116 1.0481 1 EUR 0.8645 1.0970 1.0000 1.1498 1 CHF 0.7519 0.9541 0.8697 1.0000
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