QUESTION 2 You are a French investor with access to 500,000 00 You are provided with the following quotations from a bank Exchange rate Borrowing interest rate Investment interest rate Spot rate ( $ $1 4300 1 00 4 2 per annum 4 1 per annum F 360 ( $) $1 4184 1 00 $ 3 65 per annum $ 3 5 per annum You have conducted your own calculations based on the above information and you identified an arbitrage opportunity Therefore, you have now borrowed 500,000 and know you will have to repay it with interest at the end of one year and you want to invest it in $ to make the arbitrage profit What actions will you now take a Enter into a long 521,000 forward, buy $715,000 with the 500,000, invest the $ at 3 50 Buy the 521,000 one year from now in terms of the forward contract, repay the euro loan and make a profit of $1,038 60 b Enter into a short $740,025 forward, buy $715,000 with the 500,000, invest the $ at 3 50 Sell the $740,025 one year from now in terms of the forward contract, repay the 521,000 and make a profit of $1,038 60 c Enter into a long 521 732 23 forward, buy $715,000 with the 500,000, invest the $ at 3 50 and sell the $740,025 one year from now in terms of the forward contract, repay the euro loan and make a profit of 732 23 d Enter into a short $740,025 forward, buy $715,000 with the 500,000, invest the $ at 3 5 and sell the $740,025 one year from now in terms of the forward contract, repay the euro loan and make a profit of 732 23

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QUESTION 2 You are a French investor with access to 500,000.00. You are provided with the following quotations from a bank: Exchange rate Borrowing interest

QUESTION 2

You are a French investor with access to 500,000.00. You are provided with the following quotations from a bank:

	Exchange rate	Borrowing interest rate	Investment interest rate
Spot rate (/$	$1.4300 = 1.00	= 4.2% per annum	= 4.1% per annum
F₃₆₀(/$)	$1.4184 = 1.00	$ = 3.65% per annum	$ = 3.5% per annum

You have conducted your own calculations based on the above information and you identified an arbitrage opportunity. Therefore, you have now borrowed 500,000 and know you will have to repay it with interest at the end of one year and you want to invest it in $ to make the arbitrage profit. What actions will you now take?

	a.	Enter into a long 521,000 forward, buy $715,000 with the 500,000, invest the $ at 3.50%. Buy the 521,000 one year from now in terms of the forward contract, repay the euro loan and make a profit of $1,038.60.
	b.	Enter into a short $740,025 forward, buy $715,000 with the 500,000, invest the $ at 3.50%. Sell the $740,025 one year from now in terms of the forward contract, repay the 521,000 and make a profit of $1,038.60
	c.	Enter into a long 521.732.23 forward, buy $715,000 with the 500,000, invest the $ at 3.50% and sell the $740,025 one year from now in terms of the forward contract, repay the euro loan and make a profit of 732.23.
	d.	Enter into a short $740,025 forward, buy $715,000 with the 500,000, invest the $ at 3.5% and sell the $740,025 one year from now in terms of the forward contract, repay the euro loan and make a profit of 732.23.