Siemons AG of Germany responsible in integrated circuits. One of its major suppliers, Bailer Inc is located in Liverpool. Bailer Inc is entering a contract to sell which will be paid in 9 months by Siemons AG worth USD 5 million. Lately, Germany has experienced slow economic growth due to the Brexit situation. Most of German companies are affected by this situation. There is a possibility that foreign investors especially the British Investors will leave Germany, thus give huge pressure on the Euro, which resulted in an excess supply of EUR for sale over the demand of EUR in the foreign market. The movement of GBP/EUR is presented in the following graph.

There is also a huge tendency that EUR value will continue to deteriorate in the future. The EURs reducing value can give negative effect to Siemons AG due to net cash flow resulted from its import from Bailer Inc. The finance department Siemons AG would like to ensure that the spot and forward rates that their bank offered are reasonable. If the quotes are reasonable, then no arbitrage can be carried out. Arbitrage is only possible when the spot and forward rates are not appropriate.

The head of finance department, Mr. Aldrich would like the Siemons AG to take advantage of any currency mispricing by doing arbitrage with hope that the arbitrage profit can offset any negative impact on Siemonss profit margin due to EUR depreciation.

Since you are just appointed as a financial analyst of Siemons AG, Mr Adalrich is instructing you to prepare an analysis for arbitrage opportunities.

1. The quotation of GBP/EUR are available in the table below. (a) Determine whether the quotations given are appropriate. Prove your answer. (b) If the quotations are not appropriate, find the profit (in EUR) that you can make from the locational arbitrage. Assume that you have EUR 5,000,000.

	Bid	Ask
Bank A (GBP/EUR)	0.8667	0.8669
Bank B (GBP/EUR)	0.8670	0.8673

2. Three different banks have sent their special quotation to Mr Aldrich. Based on the quotation given below, Mr Adalrich instructed you to determine the triangular arbitrage profit for Siemons if you are given EUR5,000,000.

	Bid	Ask
Bank X	MYR 5.1141/GBP	MYR5.1180/GBP
Bank Y	MYR4.2420/EUR	MYR4.2460/EUR
Bank Z	EUR 1.1532/GBP	EUR1.1535/GBP

3. Another possible step to reduce the impact of reducing the value of EUR is to consider covered interest arbitrage. The forward contract for a 270-day on EUR is GBP0.8610 and the current spot rate is GBP0.8673/EUR. The 270-day interest rate available to Siemons in Germany is 4% per annum, whilst in the United Kingdom, the 270-day interest rate is 5% per annum. (a) Which country should Siemons borrow and invest if they intend to get profit from covered interest arbitrage? (b) Determine the amount of profit from this covered interest arbitrage if you are going to use EUR5,000,000 or equivalent. State your answer in EUR.

4. What action should the European Central Bank (which is acting as Central Bank for Germany and the whole European Union) implement to stop the further changes of its currency value?

Interbank Daily Be Saturday, Sep 21, 2013 Download 0 9200 0.5000 08800 0.8600 0.0400 0 8200 Sep 1, 2019 Nov 1, 2019 Jan 2020 Interbank Daily Be Saturday, Sep 21, 2013 Download 0 9200 0.5000 08800 0.8600 0.0400 0 8200 Sep 1, 2019 Nov 1, 2019 Jan 2020