Question
With the information provided you should be able to (1) determine if there are arbitrage opportunities and (2) explain how those arbitrage opportunities can be
- With the information provided you should be able to (1) determine if there are arbitrage opportunities and (2) explain how those arbitrage opportunities can be exploited.
- The answers should be laid out clearly in numbered steps with simple sentences indicating:
- When the trade is happening
- If you are buying/selling
- If the action is taking place in the spot/forward market
- When will the action mature
- Show all cashflows and indicate the level of profits.
- If the steps are not clearly explained they will not be considered
Suppose you are a currency trade who specializes in the USDMXN pair. Right now, the spot price for USDMXN is trading at 22.4532, the 3-month forward is trading at 22.7154 and the 6-month forward is trading at 22.9458. You usually trade with three counterparties UBS, ANZ and Standard Chartered. They provide a daily report of the rates they are willing to take deposits or make loans at. The latest report looks like this:
As an example, this table can be read as: UBS is paying/charging a 0.2501% annual interest rate for a 3-month deposit or a 3-month loan in U.S. dollars, while they would be charging a 5.88% annual interest rate for a 6-month deposit or a 6-month loan in Mexican peso.
If arbitrage is possible, how much money do you stand to earn? Suppose that once you choose a bank all loans and all deposits must be done with the same entity. Also suppose that you can trade/invest 10 million USD. Use six decimal points in your calculations.
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