Question 3 The firms senior management has taken note of your expertise in arbitrage trading You have been asked to identify potential arbitrage opportunities based on the differences in exchange rates in table 4 and 5 Suppose that the actual forward rates for the end of October 2020 are as follows Comm Terms Bid Ask Opinion ( over under fairly valued ) Suggested Strategy AUD CAD 0 9447 0 9455 GBP USD 1 3100 1 3105 NZD USD 0 6510 0 6513 Table 5 Actual forward FX rates for the end of October 2020 The following are the calculated forward bid, ask and mid rates Comm Terms Bid Ask Mid AUD USD 0 7162 0 7164 0 7163 AUD EUR 0 6063 0 6067 0 6065 EUR AUD 1 6487 1 6490 1 6489 AUD GBP 0 5470 0 5473 0 5472 GBP AUD 1 8276 1 8281 1 8279 AUD JPY 75 7308 75 7608 75 7508 EUR USD 1 1809 1 1813 1 1811 GBP USD 1 3090 1 3095 1 3093 USD JPY 105 7341 105 7641 105 7541 EUR GBP 0 9018 0 9023 0 9021 EUR JPY 124 8795 124 9195 124 8995 GBP JPY 138 4200 138 4700 138 4500 AUD CAD 0 9433 0 9441 0 9437 EUR CHF 1 0746 1 0755 1 0751 GBP CHF 1 1913 1 1922 1 1918 USD CHF 0 9101 0 9103 0 9102 USD CAD 1 3174 1 3178 1 3176 NZD USD 0 6538 0 6541 0 6540 Table 4 Implied forward rates at the end of October 2020 Mid rate (bid rate ask rate) 2 Inform the company whether the commodity currencies listed in Table 5 are over , under , or fairly valued compared to the implied forward rates estimated in Table 4 1 5 Marks , and what is your suggested strategy to the top management (buy or sell the commodity currency) 1 5 Marks If there is any arbitrage opportunity available between the implied forward rates estimated in Table 4 and the actual forward rates listed in Table 5, how much profit can you generate for the company as a price taker with 50,000,000 units of currency ( choose the most profitable option ) 2 Marks To minimise the transaction costs involved you can only exploit arbitrage opportunities between two exchange rates (i e , No Triangular Arbitrage opportunity allowed ) Finally, you must convert profit, if any, to AUD using the mid rates estimated in Table 4 1 Mark

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Question 3 The firms senior management has taken note of your expertise in arbitrage trading. You have been asked to identify potential arbitrage opportunities based

Question 3

The firms senior management has taken note of your expertise in arbitrage trading. You have been asked to identify potential arbitrage opportunities based on the differences in exchange rates in table 4 and 5. Suppose that the actual forward rates for the end of October 2020 are as follows:

Comm / Terms	Bid	Ask	Opinion (over/under/ fairly valued)	Suggested Strategy
AUD/CAD	0.9447	0.9455
GBP/USD	1.3100	1.3105
NZD/USD	0.6510	0.6513

Table 5: Actual forward FX rates for the end of October 2020.

The following are the calculated forward bid, ask and mid rates:

Comm / Terms	Bid	Ask	Mid
AUD/USD	0.7162	0.7164	0.7163
AUD/EUR	0.6063	0.6067	0.6065
EUR/AUD	1.6487	1.6490	1.6489
AUD/GBP	0.5470	0.5473	0.5472
GBP/AUD	1.8276	1.8281	1.8279
AUD/JPY	75.7308	75.7608	75.7508
EUR/USD	1.1809	1.1813	1.1811
GBP/USD	1.3090	1.3095	1.3093
USD/JPY	105.7341	105.7641	105.7541
EUR/GBP	0.9018	0.9023	0.9021
EUR/JPY	124.8795	124.9195	124.8995
GBP/JPY	138.4200	138.4700	138.4500
AUD/CAD	0.9433	0.9441	0.9437
EUR/CHF	1.0746	1.0755	1.0751
GBP/CHF	1.1913	1.1922	1.1918
USD/CHF	0.9101	0.9103	0.9102
USD/CAD	1.3174	1.3178	1.3176
NZD/USD	0.6538	0.6541	0.6540
Table 4: Implied forward rates at the end of October 2020. Mid rate = (bid rate + ask rate)/2

Inform the company whether the commodity currencies listed in Table 5 are over-, under-, or fairly valued compared to the implied forward rates estimated in Table 4 [1.5 Marks],

and what is your suggested strategy to the top management (buy or sell the commodity currency)? [1.5 Marks]. If there is any arbitrage opportunity available between the implied forward rates estimated in Table 4 and the actual forward rates listed in Table 5, how much profit can you generate for the company as a price taker with 50,000,000 units of currency (choose the most profitable option) [2 Marks]. To minimise the transaction costs involved you can only exploit arbitrage opportunities between two exchange rates (i.e., No Triangular Arbitrage opportunity allowed). Finally, you must convert profit, if any, to AUD using the mid rates estimated in Table 4 [1 Mark].