Comm / Terms Bid Ask Mid AUD/USD 0.7162 0.7164 0.7163 AUD/EUR 0.6063 0.6067 0.6065 EUR/AUD 1.6487 1.6490 1.64890 AUD/GBP 0.5470 GBP/AUD AUD/JPY 1.8276 75.7308 0.5473 1.8281 75.7608 0.54718 1.8279 75.7508 EUR/USD 1.1809 1.1813 1.1811 1.3090 1.3095 1.3093 GBP/USD USD/JPY 105.7341 105.7641 105.7541 EUR/GBP 0.9018 0.9023 0.9021 EUR/JPY 124.8795 124.9195 124.8995 GBP/JPY 138.4200 138.4700 138.4500 AUD/CAD 0.9433 0.9441 0.9437 EUR/CHF 1.0746 1.0755 1.0751 GBP/CHF 1.1913 1.1922 1.1918 USD/CHF 0.9101 0.9103 0.9102 USD/CAD 1.3174 1.3178 1.3176 NZD/USD 0.6538 0.6541 0.6540 Table 4: Implied forward rates at the end of October 2020. Mid rate = (bid rate + ask rate)/2 Question 3 [6 marks] The firm's senior management has taken note of your expertise in arbitrage trading. You have been asked to identify potential arbitrage opportunities based on the differences in exchange rates in table 4 and 5. Suppose that the actual forward rates for the end of October 2020 are as follows: Comm/ Terms Bid Ask Opinion (over/under/ fairly.. valued) Suggested Strategy AUD/CAD 0.9447 0.9455 GBP/USD 1.3100 1.3105 NZD/USD 0.6510 0.6513 Table 5: Actual forward FX rates for the end of October 2020. Inform the company whether the commodity currencies listed in Table 5 are over-, under-, or fairly valued compared to the implied forward rates estimated in Table 4 [1.5 Marks], and what is your suggested strategy to the top management (buy or sell the commodity currency)? (1.5 Marks]. If there is any arbitrage opportunity available between the implied forward rates estimated in Table 4 and the actual forward rates listed in Table 5, how much profit can you generate for the company as a price taker with 50,000,000 units of currency (choose the most profitable option) [2 Marks]. To minimise the transaction costs involved you can only exploit arbitrage opportunities between two exchange rates (i.e., NO TRIANGULAR ARBITRAGE OPPORTUNITY ALLOWED). Finally, you must convert profit, if any, to AUD using the mid rates estimated in Comm / Terms Bid Ask Mid AUD/USD 0.7162 0.7164 0.7163 AUD/EUR 0.6063 0.6067 0.6065 EUR/AUD 1.6487 1.6490 1.64890 AUD/GBP 0.5470 GBP/AUD AUD/JPY 1.8276 75.7308 0.5473 1.8281 75.7608 0.54718 1.8279 75.7508 EUR/USD 1.1809 1.1813 1.1811 1.3090 1.3095 1.3093 GBP/USD USD/JPY 105.7341 105.7641 105.7541 EUR/GBP 0.9018 0.9023 0.9021 EUR/JPY 124.8795 124.9195 124.8995 GBP/JPY 138.4200 138.4700 138.4500 AUD/CAD 0.9433 0.9441 0.9437 EUR/CHF 1.0746 1.0755 1.0751 GBP/CHF 1.1913 1.1922 1.1918 USD/CHF 0.9101 0.9103 0.9102 USD/CAD 1.3174 1.3178 1.3176 NZD/USD 0.6538 0.6541 0.6540 Table 4: Implied forward rates at the end of October 2020. Mid rate = (bid rate + ask rate)/2 Question 3 [6 marks] The firm's senior management has taken note of your expertise in arbitrage trading. You have been asked to identify potential arbitrage opportunities based on the differences in exchange rates in table 4 and 5. Suppose that the actual forward rates for the end of October 2020 are as follows: Comm/ Terms Bid Ask Opinion (over/under/ fairly.. valued) Suggested Strategy AUD/CAD 0.9447 0.9455 GBP/USD 1.3100 1.3105 NZD/USD 0.6510 0.6513 Table 5: Actual forward FX rates for the end of October 2020. Inform the company whether the commodity currencies listed in Table 5 are over-, under-, or fairly valued compared to the implied forward rates estimated in Table 4 [1.5 Marks], and what is your suggested strategy to the top management (buy or sell the commodity currency)? (1.5 Marks]. If there is any arbitrage opportunity available between the implied forward rates estimated in Table 4 and the actual forward rates listed in Table 5, how much profit can you generate for the company as a price taker with 50,000,000 units of currency (choose the most profitable option) [2 Marks]. To minimise the transaction costs involved you can only exploit arbitrage opportunities between two exchange rates (i.e., NO TRIANGULAR ARBITRAGE OPPORTUNITY ALLOWED). Finally, you must convert profit, if any, to AUD using the mid rates estimated in
