You are a currency arbitrageur, use the following data to make a 180 day CIA recommendation (assume that the borrowing and investing rates are identical, that the bid ask spread in the foreign exchange markets is zero and that there are no transactions costs) 10 marks Data Home Canada Available funds CAD 5,000,000 or equivalent in EUR Spot 1 48 CAD EUR Annual T Bill rate Canada 4 Euro 1 Forward 180 day 1 52 CAD EUR Show how you can determine if there is a profitable arbitrage opportunity Calculate the forward premium or discount and use the arbitrage rules of thumb to decide your CIA strategy Represent your CIA strategy in a diagram showing the currency exchanges, borrowing, and investing flows, and show all calculations Clearly state the arbitrage profit (round your final answer to the dollar, no decimals)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Oct 04, 2024

You are a currency arbitrageur, use the following data to make a 180-day CIA recommendation (assume that the borrowing and investing rates are identical, that

You are a currency arbitrageur, use the following data to make a 180-day CIA recommendation (assume that the borrowing and investing rates are identical, that the bid-ask spread in the foreign exchange markets is zero and that there are no transactions costs). 10 marks

Data:

Home: Canada;
Available funds: CAD 5,000,000 or equivalent in EUR
Spot: 1.48 CAD/EUR;
Annual T-Bill rate: Canada 4%; Euro: 1%
Forward 180-day: 1.52 CAD/EUR

Show how you can determine if there is a profitable arbitrage opportunity.
Calculate the forward premium or discount and use the arbitrage rules of thumb to decide your CIA strategy
Represent your CIA strategy in a diagram showing the currency exchanges, borrowing, and investing flows, and show all calculations. Clearly state the arbitrage profit (round your final answer to the dollar, no decimals).