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Answer all questions. Question 2 Assume you are a trader with Cintech Bank in the US. From the quote screen on your computer terminal, you
Answer all questions.
Question 2 Assume you are a trader with Cintech Bank in the US. From the quote screen on your computer terminal, you notice that Mercy Bank is quoting 0.7235/$1.00 and Credit DT is offering SF1.1304/$1.00. You learn that Union Bank of Switzerland (UBS) is making a direct market between the Swiss franc and the euro, with a current /SF quote of 0.6332 Assume you have $6,000,000 with which to conduct the arbitrage and ignore bid-ask spreads for this trading. Besides, you have a subsidiary company located in Singapore, namely MJ Pte Ltd. MJ Pte Ltd imports pharmaceuticals products from the US. It is expected the coming quarter invoices that bill from the US is as follows: In one month's time In two months time In three months' time US$ 2 million US$ 3.5 million US$ 6 million MJ decides to use the forward market to cover its foreign currency exposure. The following are a Singapore bank quoted US$ spot rate and forward points: Spot One month Two months Three months Six months Bid 1.3620 32 53 87 125 Offer 1.3636 22 44 76 108 Required: How you can make a triangular arbitrage profit based on above trading information? (8 marks) (a) (b) What happens if you initially sell dollars for Swiss francs? (8 marks) (c) What /SF price will eliminate triangular arbitrage? (5 marks) (d) Why the law of one price fails almost all of the time? Explain. (10 marks) Compute the forward rates to cover the foreign currency exposures for MJ Pte Ltd. (6 marks) Calculate the total of SG$ that MJ Pte Ltd needs to pay for the expected invoices. (13 marks) [Total: 50 Marks]Step by Step Solution
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