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You are a hedge fund looking for arbitrage opportunities between the spot FX market and 6 month FX forwards and money markets. You observe the
You are a hedge fund looking for arbitrage opportunities between the spot FX market and 6 month FX forwards and money markets. You observe the following quotes from market makers in these markets for South African Rand (ZAR) and US dollars (USD): Bid Ask S(ZAR/USD) 15.845 15.849 Fm(ZAR/USD) 15.865 15.880 6m Lending Rate 6m Borrowing Rate ZAR 0.98%pa 1.12% pa USD 0.40%pa 0.50%pa At these prices: You can make an arbitrage profit because the FX forward bid is too high by approximately 0.1. The arbitrage trade involves you borrowing ZAR in six month money markets. You can make an arbitrage profit because the FX forward ask is too low by approximately 0.04. The arbitrage trade involves you lending ZAR in six month money markets. You can make an arbitrage profit because the FX forward ask is too low by approximately 0.003. The arbitrage trade involves you lending ZAR in six month money markets. You can make an arbitrage profit because the FX forward bid is too high by approximately 0.04. The arbitrage trade involves you borrowing ZAR in six month money mar O None of the other answers
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