Keiser University Triangular Arbitrage Case Questions Discussion

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1.Beal Bank Yardley Bank

Bid price of Swiss Franc$.201$.198

Ask price of Swiss Franc$.204$.200

Given this information, is locational arbitrage possible?  Explain why.

2.Beal Bank Yardley Bank

Bid price of Malaysian Ringitt$.705$.709

Ask price of Malaysian Ringitt$.706$.710

Given this information, is locational arbitrage possible? Explain Why. What is the profit made on this transaction if you have $10,000 U.S. dollars and purchase and sell Ringitt using locational arbitrage?

3.Triangular Arbitrage.Assume the following information:

Quoted Price

Value of Canadian dollar in U.S. dollars$1.20

Value of Mexican Peso in U.S. dollars$.30

Value of Canadian dollar in Mexican pesosMX$4.02

Given this information, is triangular arbitrage possible? Explain why.What is the profit earned if you have $10,000 U.S. dollars and purchase and sell MX dollars using triangular arbitrage?

4.Covered Interest Arbitrage. Assume the following information about a possible investment in Germany using Euros:

Quoted Price

Spot rate of the Euro$.84

90day forward rate of Euro$.83

90day Euro interest rate5%

90day U.S. interest rate3.5%

Given this information, what would be the yield (in dollars) to a U.S. investor who used covered interest arbitrage?  (Assume the investor invests $1,000,000)

5. (a) Using the information from question 4, calculate the Interest Rate Parity using the formula below:

p= ((1+i)/(1+i))-1

What was the result? What does it mean, explain in detail using the terms in learn in chapter 7.

(b) Use the information from question 4, calculate the forward premium or discount.

P=(F-S)/S

Compare it to the Interest Rate Parity. Is this a profitable covered interest arbitrage? Why or Why not?

(c) Using the information from question 4, calculate if a profit can be made if the forward rate was $.81. Calculate the Interest Rate Parity and the Forward premium discount. What have you learned when you compare it to the previous IRP and Forward Premium (discount). Explain in detail.

In chapter 8 we learn about Purchasing Power Parity and International Fisher Effect. Define each concept in detail and then use these concepts to forecast the movements of the following spot rates:

6.Estimating Depreciation Due to PPP. Assume that the spot exchange rate of the British pound is$1.73.  How will this spot rate adjust according to PPP if the United Kingdom

experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?

7. Forecasting the Future Spot Rate Based on IFE. Assume that the spot exchange rate of the Singapore dollar is $.70.  The one year interest rate is 11 percent in the United States and 7 percent in Singapore.  What will the spot rate be in one year according to the IFE?  Which force causes the spot rate to change according to the IFE?