Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Arbitraging between currencies and interest rates Use arbitrage to take advantage of interest rate and spot/forward rate differentials. E.g., using the following table, compute profits

Arbitraging between currencies and interest rates

Use arbitrage to take advantage of interest rate and spot/forward rate differentials. E.g., using the following table, compute profits from arbitrage.

Currency

Annual (90-day) interest rates

e0

f90

7 7/16 5/16

240.9696 9912/

224.5731 8692/

2 3/8 1/4

  1. Borrow 1,000,000 for 90 days (repayment = [1+ ((7 7/16)/4] = 1,018,594)
  2. Convert 1,000,000 into yen at spot rate ([1,000,000 (240.9696)] = 240,969,600)
  3. Invest yen for 90 days (proceeds = [240,969,600 (1 + ((2 1/4)/4)] = 242,325,054)
  4. Sell proceeds from forward for pounds (242,325,054/ 224.8692 = 1,077,627)
  5. Profit = 1,077,627 - 1,018,594 = 59,033

Please explain in detail how to calculate number 1 and number 3 from the solution above.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

International Marketing And Export Management

Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr

8th Edition

1292016922, 978-1292016924

More Books

Students also viewed these Finance questions