Homework # 3: International Arbitrage and Interest Rate Parity. Answer the following questions: 1. Assume the following in formation: BEAL BANK YARDLEY BANK Bid price of New Zealand dollar $0.402 $0.397 $0.400 Ask price of New Zealand dollar $0.405 Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1 million to use. What market forces would occur to eliminate any further possibilities of locational arbitrage? 2. Assume the following information: BID PRICE ASK PRICE Value of Canadian dollar in U.S. dollars $0.90 $0.92 Value of New Zealand dollar in U.S. dollars $0.30 $0.32 NZ$ 3.10 Value of Canadian dollar in New Zealand dollars NZ$ 3.04 Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1 million to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage? 3. Assume the following information: Spot rate of Canadian dollar = $.80 90-day forward rate of Canadian dollar = $.79 90-day Canadian interest rate = 4% 90-day U.S. interest rate = 2.5% Given this information, what would be the yield (per- centage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1 million.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage? Submit your answers to Homework # 2 in this folder by the due date and time. NO LATE SUBMISSION WILL BE ACCEPTED.