Bank Bid Banco do Brasil 0.6152 Itau 0.6149 Bradesco 0.6172 Unibanco 0.6167 Note that BRLUSD indicates USD per BRL Ask 0.6171 0.6166 0.6185 0.6178 BRLUSD Six-Month Forward Quotes Bank Bid HSBC 0.5943 Itau 0.5889 Note that BRLUSD indicates USD per BRL Ask 0.5972 0.5911 Interest Rates (simple interest basis) Bank: Currency Bank Borrows Bank Lends BNP Paribas USD 2.4% 3.0% Unibanco: BRL 12.2% 13.1% Mr. Bent requests answers to the following questions: 1. There appears to be a wide disparity between the spot quotes. If Clover wishes to simply use these markets to short BRL-unload BRL revenues, for instanceit would choose to transact with Bradesco. But is there opportunity for currency arbitrage contained in these spot rates? Assume that USD 1 million is directed toward this activity. Note that BRLUSD indicates USD per BRL 2. How would bank commissions for currency transactions affect arbitrage? Assume a roundtrip (for buying and selling) transaction fee of USD 175 (same fee in all banks; half of this amount for a single trip). Is the transaction identified in (1) profitable after commissions? Next, assume round-trip commissions are a percentage fee of transaction size: What is the break-even percent commission? 3. Mr. Bent notes high interest rates in Brazil. How can Clover deploy USD 1 million to exploit these rates? A possible strategy is to invest in a foreign currency and lock-in USD returns by using forward rates Calculate the annualized return of such an investment. Note that quoted rates apply to six-month transactions but have been annualized. Ignore bank commission and fees. Compare your strategy with covered interest arbitrage. What are the similarities and differences? 4. Employ an investment strategy opposite to that discussed in (3). That is, evaluate opportunities for deploying BRL 1 million in a USD-denominated interest-bearing deposit. Apply the method used in answering (3). Bank Bid Banco do Brasil 0.6152 Itau 0.6149 Bradesco 0.6172 Unibanco 0.6167 Note that BRLUSD indicates USD per BRL Ask 0.6171 0.6166 0.6185 0.6178 BRLUSD Six-Month Forward Quotes Bank Bid HSBC 0.5943 Itau 0.5889 Note that BRLUSD indicates USD per BRL Ask 0.5972 0.5911 Interest Rates (simple interest basis) Bank: Currency Bank Borrows Bank Lends BNP Paribas USD 2.4% 3.0% Unibanco: BRL 12.2% 13.1% Mr. Bent requests answers to the following questions: 1. There appears to be a wide disparity between the spot quotes. If Clover wishes to simply use these markets to short BRL-unload BRL revenues, for instanceit would choose to transact with Bradesco. But is there opportunity for currency arbitrage contained in these spot rates? Assume that USD 1 million is directed toward this activity. Note that BRLUSD indicates USD per BRL 2. How would bank commissions for currency transactions affect arbitrage? Assume a roundtrip (for buying and selling) transaction fee of USD 175 (same fee in all banks; half of this amount for a single trip). Is the transaction identified in (1) profitable after commissions? Next, assume round-trip commissions are a percentage fee of transaction size: What is the break-even percent commission? 3. Mr. Bent notes high interest rates in Brazil. How can Clover deploy USD 1 million to exploit these rates? A possible strategy is to invest in a foreign currency and lock-in USD returns by using forward rates Calculate the annualized return of such an investment. Note that quoted rates apply to six-month transactions but have been annualized. Ignore bank commission and fees. Compare your strategy with covered interest arbitrage. What are the similarities and differences? 4. Employ an investment strategy opposite to that discussed in (3). That is, evaluate opportunities for deploying BRL 1 million in a USD-denominated interest-bearing deposit. Apply the method used in answering (3)
