Compare the one-year forward premium or discount on the French franc to the one-year Eurodollar and Eurofranc interest rates shown in Exhibit 2. How can
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Compare the one-year forward premium or discount on the French franc to the one-year Eurodollar and Eurofranc interest rates shown in Exhibit 2. How can this situation be arbitraged?
2. What would be the $/SDR bid if the SDR appreciates 15% against the dollar? What would be the SDR/$ offer rate if the SDR appreciates 15%?
3. Examine the cross-spot rates shown in Exhibit 2. Are there any triangular arbitrage opportunities among these currencies (assume deviations from theoretical cross rates of 5 points or less are attributable to transaction costs)? How much profit could be made on a $5 million transaction?
| Table 1 | |||
| Spot | 3-Month Forward | ||
| French Franc | 7.7150/200 | 300/425 | |
| 3 Mo. Eurofranc Deposit Rate | 115/8-11 3/4% | ||
| 3 Mo. Eurodollar Deposit Rate | 7 7/8 - 8% | ||
| Exhibit 1 Spot and Forward Exchange Rates | |||||
| Currency | Spot | 1 Month | 3 Months | 6 Months | 12 Months |
| Sterlinga | 1.4890/00 | 55/52 | 160/156 | 302/289 | 560/523 |
| Deutsche mark | 2.0310/20 | 22/18 | 64/54 | 128/105 | 277/228 |
| French Franc | 6.6575/625 | 73/86 | 263/296 | 505/590 | 1194/1351 |
| Yen | 154.20/30 | 8/6 | 33/27 | 75/62 | 164/137 |
| SDRa | 1.2141/43 | 5/3 | 12/8 | 18/11 | 24/12 |
| aU.S. dollars per unit of currency.
| |||||
| Exhibit 2 Cross-Spot Exchange Ratesa | |||
| DM | FF | Yen | |
| DM | - | .3050/51 | 1.3169/71 |
| FF | 3.2779/88 | - | 4.3365/84 |
| Yen | 75.9232/350 | 23.1595/618 | - |
| aQuotes should be interpreted as units of the currency represented in the left-hand column per unit of currency shown in the top row. Quotes for the DM/yen and FF/yen are expressed in units per 100 yen. | |||
| Exhibit 3 Eurocurrency Interest Rates | ||||
| Currency | 1 Month | 3 Months | 6 Months | 12 Months |
| U.S. Dollar | 5.6875-5.8125 | 5.5000-5.6250 | 5.5000-5.6250 | 5.6250-5.7500 |
| Sterling | 10.0625-10.1875 | 9.8750-9.9375 | 9.6875-9.7500 | 9.6250-9.7500 |
| Deutsche mark | 4.4375-4.5625 | 4.3125-4.4375 | 4.3125-4.4375 | 4.3125-4.4375 |
| French Franc | 7.1250-7.2500 | 7.1875-7.3125 | 7.1875-7.3125 | 7.2500-7.3750 |
| Yen | 5.1250-5.1875 | 4.7500-4.8125 | 4.6250-4.6875 | 4.6250-4.6875 |
| SDR | 5.9375-6.0625 | 5.8125-5.9375 | 5.7500-5.8750 | 5.8125-5.9375 |
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Authors: Alexander Lipton, Andrew Rennie
1st Edition
0199546789, 978-0199546787
