The decreasing value of GBP Opportunity or Threat (Topic 2 and 4) Submission deadline 30 November 2022 The British Pound Sterling (GBP) is the fourth most popularly traded currency, and the third most commonly held reserve currency The British Pound Sterling represents the economy of The United Kingdom, which consists of England, Scotland, Wales, and Northern Ireland, and the Pound Sterling is the sixth largest currency in terms of Gross Domestic Product, and the 8th largest in terms of Purchasing Power Parity in the world However, in 2022, the GBP seems to be volatile and keep on decreasing since March The GBP reach the lowest point in 27th September 2022 at USD1 06852 GBP since 1985 Among the reasons are falling of GBP value are local and international traders appear increasingly anxious about the UK's economic outlook, with runaway inflation caused by Russia's war in Ukraine, which pose a threat to economies around the world including UK The soaring inflation nearly 9 9 (the highest since 1980s and predicted to continue soar at 11 in November 2022) and a cost of living crisis pose an immediate challenge to the government, especially after the newly appointed UK prime minister, Liz Truss resigned on 20th October 2022 who holds the position only for 45 days The GBP continues to drop against USD and EUR a day after the Bank of England hiked interest rates to 50 basis points As it raised rates, the bank announced that the UK may already be in recession, defined as two successive quarters of economic contraction There are fears that higher interest rates could stifle investment as the cost of borrowing rises Lindsay Pakenham is working as Chief Finance Officer with Whidbey Holding in London Whidbey is the producer of gas turbine and currently rely on its financier in Chicago, Bremen Bank Whidbey will send sufficient monthly payments (in US dollars) to the Bremen Bank If the USD appreciates against the GBP over time, it may affect the company's wealth Lindsay believes that she can overcome this issue by taking advantage of the current situation She knows that any currency mispricing can be overcome by doing arbitrage She also believes that the arbitrage profit can offset any negative impact on her company 1 Lindsay requests a quotation of GBP USD from Bank A and Bank B Assume that she has GBP 8 million as authorized by Whidbey (a) Determine whether the quotations given are appropriate Prove your answer (b) If the quotations are not appropriate, find the profit (in GBP) that you can make from the locational arbitrage Assume there is no commission fees involved Bid Bank A(USD GBP) Bank B (USD GBP) 1 1290 Ask 1 1280 1 1289 1 1293 Lindsay also trying to take an opportunity of making triangular arbitrage profit She requested the quotation of USD GBP from Bank X, Y and Z Using the authorized fund of GBP 8 million, is she able to make profit If yes, how much

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The decreasing value of GBP: Opportunity or Threat? (Topic 2 and 4): Submission deadline: 30 November 2022 The British Pound Sterling (GBP) is the fourth

The decreasing value of GBP: Opportunity or Threat? (Topic 2 and 4): Submission deadline: 30 November 2022 The British Pound Sterling (GBP) is the fourth most popularly traded currency, and the third most commonly held reserve currency. The British Pound Sterling represents the economy of The United Kingdom, which consists of England, Scotland, Wales, and Northern Ireland, and the Pound Sterling is the sixth largest currency in terms of Gross Domestic Product, and the 8th largest in terms of Purchasing Power Parity in the world. However, in 2022, the GBP seems to be volatile and keep on decreasing since March. The GBP reach the lowest point in 27th September 2022 at USD1.06852/GBP since 1985. Among the reasons are falling of GBP value are local and international traders appear increasingly anxious about the UK's economic outlook, with runaway inflation caused by Russia's war in Ukraine, which pose a threat to economies around the world including UK.
The soaring inflation- nearly 9.9% (the highest since 1980s and predicted to continue soar at 11% in November 2022) and a cost-of-living crisis pose an immediate challenge to the government, especially after the newly appointed UK prime minister, Liz Truss resigned on 20th October 2022 who holds the position only for 45 days. The GBP continues to drop against USD and EUR a day after the Bank of England hiked interest rates to 50 basis points As it raised rates, the bank announced that the UK may already be in recession, defined as two successive quarters of economic contraction. There are fears that higher interest rates could stifle investment as the cost of borrowing rises. Lindsay Pakenham is working as Chief Finance Officer with Whidbey Holding in London Whidbey is the producer of gas turbine and currently rely on its financier in Chicago, Bremen Bank. Whidbey will send sufficient monthly payments (in US dollars) to the Bremen Bank. If the USD appreciates against the GBP over time, it may affect the company's wealth Lindsay believes that she can overcome this issue by taking advantage of the current situation. She knows that any currency mispricing can be overcome by doing arbitrage. She also believes that the arbitrage profit can offset any negative impact on her company. 1. Lindsay requests a quotation of GBP/USD from Bank A and Bank B. Assume that she has GBP 8 million as authorized by Whidbey.
(a) Determine whether the quotations given are appropriate. Prove your answer.
(b) If the quotations are not appropriate, find the profit (in GBP) that you can make from the locational arbitrage. Assume there is no commission fees involved. Bid Bank A(USD/GBP) Bank B (USD/GBP) 1.1290 Ask 1.1280 1.1289 1.1293 Lindsay also trying to take an opportunity of making triangular arbitrage profit. She requested the quotation of USD/GBP from Bank X, Y and Z. Using the authorized fund of GBP 8 million, is she able to make profit? If yes, how much?