The British pound (GBP) is currently priced at $1.50 and the Swiss Franc (SF) is priced at $0.50, while the quoted cross rate is 1GB =3.50 SF. If you have $1,000, can you make an arbitrage profit? If so, describe the steps required to create the opportunity and show the profit. If there is no arbitrage profit opportunity, describe how you arrived at that decision.

The British pound (GBP) is currently priced at $1.50 and the Swiss Franc (SF) is priced at $0.50, while the quoted cross rate is 1GB =3.50 SF. If you have $1,000, can you make an arbitrage profit? If so, describe the steps required to create the opportunity and show the profit. If there is no arbitrage profit opportunity, describe how you arrived at that decision.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 5P: Suppose that the exchange rate is 0.60 dollars per Swiss franc. If the franc appreciates 10% against...

See similar textbooks

Similar questions

Assume the following quotes: Citibank quotes U.S. dollars per pound at $1.5400/£ National Westminster quotes euro per pound at €1.6000/£ Deutsche bank quotes dollars per euro at $0.9700/€ Is there an arbitrage opportunity based on these quotations? If so, show how a market trader with one million $ (1,000.000 $) can make an inter-market arbitrage profit, and calculate that profit.
Assuming the following quotes: Citibank quotes U.S. dollars per pound at $1.5400/£ National Westminster quotes euro per pound at €1.6000/£ Deutsche bank quotes dollars per euro at $0.9700/€ Is there an arbitrage opportunity based on these quotations? If so, show how a market trader with one million $ (1,000.000 $) can make an inter-market arbitrage profit, and calculate that profit.
Assume the following information: Quoted Price Value of Canadian dollar in U.S. dollars $.90 Value of New Zealand dollar in U.S. dollars $.30 Value of Canadian dollar in New Zealand dollars NZ$3.02 Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage? a) Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist: Lending Rate Borrowing Rate U.S. dollar 7.0% 7.2% Singapore dollar…
Masons intends to purchase goods valued at £2.09 million, with payment due in one year. To mitigate the exchange rate risk associated with the £2.09 million payment, Masons is considering the forward market hedging strategy. Using the data provided in Table 1, determine the cost in Chinese yuan (CNY) when employing the forward market hedging strategy. (Please input the value as a whole number, excluding any signs or symbols). TABLE 1 For Chinese yuan (CNY) Spot rate £0.3755/CNY One-year forward rate £0.5381/CNY One-year CNY deposit and borrowing rate 8.48% One-year call options Exercise price = £0.52 Premium = £0.03 One-year put options Exercise price = £0.58 Premium = £0.06 For British Pound (£) Spot rate CNY3.5909/£ One-year forward rate CNY1.918/£ One-year £ deposit and borrowing rate 4.71% One-year call options Exercise price = CNY1.64 Premium = CNY0.17…
A U.S. investor can borrow 1,000,000 or 500,000 GBP. The spot rate is $2.00/GBP, the one year forward rate is $2.02/GBP. The U.S. one year interest rate is 14% and the one year British interest rate is 12%. Determine if there is a covered interest rate arbitrage opportunity, and if so, clearly show each step involved in the arbitrage opportunity. Show the total dollar profit. If you determined that there is no arbitrage opportunity, describe why you made that decision.
Suppose that right now, the market price of one Chinese yuan (CNY) is USD 0.15; that is, one can purchase or sell CNY1.00 for USD0.15. The proportional standard deviation for CNY in terms of USD is 20%. The Chinese riskless return rate over a two-year period is projected to be 8%; U.S. ratesover the same period are 2%. What is the dollar value of a two-year European put on a single yuan if the exercise price of the put is USD0.20?
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/U.S. dollar = 1.5971 CHF/USD Australian dollar/U.S. dollar = 1.8215 AUD/USD Australian dollar/Swiss franc = 1.1300 AUD/CHF Does Doug Bernard have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, how much would he profit if he has $1,000,000 USD? A. No, there is no profitable arbitrage opportunity. B. Yes, he can make $9,296 USD profit. C. None is correct. D. Yes, he can make $8,573 USD profit.
Suppose that California Co., a U.S. based MNC, seeks to capitalize a difference in interest rates between euros and British pounds via the use of a carry trade. In particular, after 1 month, funds invested in euros will yield a 0.50% percent return, while funds invested in pounds will yield a return of 2.00% percent. Currently the spot rate of the British pound is $1.00 while the spot rate of the euro is $0.80. In other words, the pound is worth 1.25 euros. California Co. expects these spot rates to remain constant over the next month. After repaying their euro loan, California Co. has 211,200 pounds remaining. Assume that the exchange rate is still $1.00 per pound. These pounds are equivalent to $ , which represents a profit of $ over the initial $200,000 that California Co. used from their own funds.
Assume the following information: Quoted Price Value of Canadian dollar in U.S. dollars $.90 Value of New Zealand dollar in U.S. dollars $.30 Value of Canadian dollar in New Zealand dollars NZ$3.02 Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of triangula r arbitrage?
assuming japan to be the home country, suppose you have the following data: Japanese interst rate=1% p.a., Brazilian interest rate = 10% p.a. Spot rate=0.025BRL/Yen, 1 year forward rate=0.026BRL/yen 1). Compute the annualized forward premium/discount on Yen b). Compute the annual interest rate differential between countries c). is tere a possibilit for earning risk-free profit? if soc compute the profit if you have an equivalent of 100 million Yen at your disposal. d). what is such a profit called? e). at what forward rate, the profit making arrangement will lose its lucrativeness?
Suppose then that we have three London seats, New York and Madrid In the first, the buyer type is 109,590 Yen per Dollar, in London the selling rate is 180,000 Yen per Pound Sterling while in New York is 1,677 dollars per British Pound  Suppose we have 100,000,000 yen  Carry out the arbitrage indicate the gain in terms absolute and percentage terms
Shava specializes in cross-rate arbitrage. He notices the following quotes: Swiss franc/dollar = SFr1.5987/$ Australian dollar/U.S. dollar = A$1.8233/$ Australian dollar/Swiss franc = A$1.1452/SFr Ignoring transaction costs, does Shava have an arbitrage opportunity based on these quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage profit, and how much would he profit if he has $1,000,000 available for this purpose?