Agnes bank in Japan has committed to deliver yen in 3 months to OK Ltd in US, a corporate customer. The spot rate is 130 yen to the dollar and the 3 month forward rate is 120 yen per dollar. In recent years, there are an increasing trading dealing with foreign currency in Agnes bank.

Required:

1. Are there costs to hedging this exposure with the forward market? Explain. (10 marks)

2. Explain TWO (2) reasons about the level of foreign currency trading has increased in Agnes bank? (5 marks)

3. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity? (10 marks)