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Q4 Assume you are a trader with Bank of America (BOA). From the quote screen on your computer terminal, you notice that BOA is quoting
Q4 Assume you are a trader with Bank of America (BOA). From the quote screen on your computer terminal, you notice that BOA is quoting as the following: Spot 1 Month Forward 3 Month Forward &$ $1.21/ $1.22/ $1.23/ SF&$ $1.09/SF $1.08/SF $1.07/SF (a) What should the spot cross exchange rate S(/SF) be? (6pt.) (b) You learn that Citi Bank is making a direct market between the Swiss franc and the euro, with a current quote of SF1.13/. Show how you can make a triangular arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage, how much the profit (in dollar) is? (15 pt.) (c) Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.11/ in three months. Assume that you would like to buy or sell 1,000,000 in 3 months. What actions do you need to take to speculate in the forward market? Why? What is the expected dollar profit from speculation? (10 pt.) (d) If you did what you suggested in (d), what would be your speculative profit in dollar terms if the spot exchange rate actually turns out to be $1.25/ in three months
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