Question
EURUSD Spot Quotes Bank Bid Ask Citibank 1.1930 1.1935 HSBC 1.1935 1.1940 JP Morgan Chase 1.1925 1.1930 EUR/USD 6-month Forward Quotes Bank Bid Ask Barclays
EURUSD Spot Quotes | ||||||
Bank | Bid | Ask | ||||
Citibank | 1.1930 | 1.1935 | ||||
HSBC | 1.1935 | 1.1940 | ||||
JP Morgan Chase | 1.1925 | 1.1930 | ||||
EUR/USD 6-month Forward Quotes | ||||||
Bank | Bid | Ask | ||||
Barclays Bank | 1.1870 | 1.1875 | ||||
Royal Bank of Canada | 1.1900 | 1.1905 | ||||
6-month Interest Rates (annualized - simple interest) | ||||||
Bank | Currency | Interest Rate | ||||
Bank of America | U.S. Dollar | 0.50% | ||||
Deutsche Bank | Euro | 1.50% | ||||
Use the data tables to answer the three following questions.
1) Given the above three spot quotations for EUR/USD is there an opportunity for arbitrage in the spot market? If so, from which banks would you choose for which transactions? Assume that your transactions in this potential spot market arbitrage could be done in increments of EUR 1,000,000. What would the USD profit be?
2) Assume that you are a U.S. corporation and need to buy EUR 3,000,000 to cover an A/P due in 6 months. Of the two banks that have quoted the forward prices, which bank would you use for your transaction? How much money did you save your company by choosing this price as opposed to the other price?
3) Is there a covered interest arbitrage opportunity? Start with the assumption that you will borrow 1,000,000 U.S. dollars and can convert them into Euros at the spot rate of EURUSD=1.1935. Demonstrate your answer mathematically
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