Question 1

Part A

Makola Forex Bureau quotes bid-ask rates for the Nigerian naira against the Ghana cedi as 74.58/Gh - 76.45/Gh. Manu is a trader at Okaishie that has negotiated a deal for the supply of 1,000,000 worth of goods from Nigeria for sale in Ghana. In anticipation of this order of goods from Nigerian, Manu buys 1,000,000 with cedis from Makola Forex Bureau. After the purchase of the naira, Manu is told by the Nigerian supplier that the deal for the supply of the goods is off. Manu returns to Makola Forex Bureau to sell back the naira for cedis (assume that the quoted exchange rate had not changed).

1. Determine the cost in cedis of the first transaction where Manu buys the 1,000,000 with cedis.
2. Determine how much Manu would receive in second transaction where Manu sells the 1,000,000 for cedis, and hence how much Manu loses.
3. Given the naira per cedi quote above, calculate the percentage bid-ask spread, and briefly discuss why you would normally expect the percentage bid-ask spread on the naira to be higher than that of the US dollar

Part B

As a foreign exchange trader, you see the following quotes for the US dollar ($), the Nigerian naira () and the Ghana cedi (Gh):

315/$ Gh4.15/$ 73.50/Gh

Is there an arbitrage opportunity, and if so, how much profit can you make if you have Gh1 million?