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 months time	US$ 2 million
In two months time	US$ 3.5 million
In three months time	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:

	Bid	Offer
Spot	1.3620	1.3636
One month	32	22
Two months	53	44
Three months	87	76
Six months	125	108

1. How you can make a triangular arbitrage profit based on above trading information? (8 marks)
2. What happens if you initially sell dollars for Swiss francs? (8 marks)
3. What /SF price will eliminate triangular arbitrage? (5 marks)
4. Why the law of one price fails almost all of the time? Explain. (10 marks)
5. Compute the forward rates to cover the foreign currency exposures for MJ Pte Ltd. (6 marks)
6. Calculate the total of SG$ that MJ Pte Ltd needs to pay for the expected invoices. (13 marks)