Question
Arbitrage and/or Carry trade Important: Observe appreciation or depreciation of the currency in forecastes: Explain answer and calculations-Use a scenario analysis: take risk attempt to
Arbitrage and/or Carry trade
Important: Observe appreciation or depreciation of the currency in forecastes:
Explain answer and calculations-Use a scenario analysis: take risk attempt to compare to not risking
)What happens if spot rate stays the same?
)What happens if the spot rate stays the same?
)What happens if the spot rate stays equal to to forward rate?
After some research, Nanotronics assembles the following data with the aim of executing a carry trade practice on $65,000.00 of its cash in the first round. In the first round, the firm stays conservative and decides not to tie up more than $65,000.00, with the aim of having its final position in USD. The firm needs to decide whether to invest (or deposit) the funds in the U.S. or in Mexico. The firm is looking for a riskless investment activity. Its horizon is exactly 9 months.
The following data are assembled. It takes the rates and figures in the market as they are given to it.
Spot rate: Buy rate MXN 19.235/USD;
Spot rate: Sell rate MXN 19.385/USD
Nine-month forward rate: Buy rate MXN 20.115/USD
Nine-month forward rate: Sell rate MXN 20.265/USD
U.S commercial interest rate (borrowing) 4.5 percent
U.S commercial interest rate (lending) 1.0 percent
Mexico commercial interest rate (borrowing or lending) 6.5 percent
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