International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Suppose that you observe the following exchange rates:
$1.75/£; $.0075/¥; and £.005/¥.
Calculation of cross rate £ and $:
£1 = $ per ¥/ £ per ¥
= 0.0075/0.005
= $ 1.50
Actual exchange rate £1 = $1.75
Cover exchange rate £1 = $1.50
Since actual exchange rate and cover exchange rate are not equal, there is no cross-rate equality.
In this case what would you expect to happen?
Suppose you have the following spot exchange rates:
USD/AUD
0.5300
AUD/EUR
1.6428
USD/EUR
0.8782
a) Calculate the US dollar profit (per 1 USD), if any, on a three-point arbitrage.
b) Calculate AUD profit (per 1 AUD), if any, on a three-point arbitrage.
c) How can you explain the answers in (1) and (2)?
Q- hardik
Assume the following spot exchange rates: $0.90 per € 1.4 € per € $1.25 per ₤ You have $1000 dollars. Which currencies should you buy in which order so as to engage in triangular arbitrage that produces a profit in dollars at the end?
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardLet's say a bank offers the following exchange rates between US Dollar ($), Euro (€), British Pound (£) and Japanese Yen (¥): $/€ 1.20 i.e., €1 equals $1.20 $/£1.40 i.e., £1 equals $1.40 €/£1,16 i.e., £1 equals €1.16 ¥/$120 i.e., $1 equals 120¥ ¥/€140 i.e., €1 equals 140¥ Show how you can make a profit with triangular arbitrage by trading at the above exchange rates by following two alternative strategies. More specifically, the first strategy should only use transactions/conversions between dollar ($), Euro (€) and poundsterling (£), while the second strategy should only use transactions/conversions between dollar ($), Euro (€) and Japanese yen (¥). In both strategies, suppose you start with $1 ($) in your hands. Calculate the profit of each strategy. Which of the two strategies is more advantageous?arrow_forwardIF 1 Suppose that you observe the following exchange rates:$1.75/£; $.0075/¥; and £.005/¥. Is there cross-rate equality? If yes, why? If not, what would you expect to happen?arrow_forward
- Suppose the Swiss Franc is currently traded at SFR 1.40/$. The British Pound is traded at GBP 1.39/$. Ignoring transaction costs:a. Determine the SFR/GBP exchange rate consistent with these direct quotations.b. Suppose the SFR/GBP cross rate in the market was at SFR 1.05/GBP. Is there any arbitrage opportunity?c. How would you take advantage of any arbitrage situation?arrow_forwardChoose the correct answer and give short explaination. 3. Advantages of a fixed exchange rates includeA. Reduction in exchange rate risk for businessesB. Reduction in transactions costsC. Reduction in trading frictionsD. All of the abovearrow_forwardLet a flexible exchange rate system. Assume a current account deficit of $100 billion. Then the capital account balance must be a . a surplus of something more than $100 million. b . a deficit of $100 billion. c . a surplus of $100 billion. d . None of the answers is correctarrow_forward
- Suppose that the interest rates in the U.S. and Germany are equal to 5%, that the forward (one year) value of the € is F$/€ = 1$/€ and that the spot exchange rate is E$/€ = 0.75$/€. Please answer the following questions by explaining all steps of your analysis: Does the covered interest parity condition hold? Why or why not? How could you make a riskless profit without any money tied up assuming that there are no transaction costs in buying and or selling foreign exchange? PLEASE SHOW ALL STEPSarrow_forwardChoose a,b,c,d,e for the following: Question 10 - Which of the following is true? a. An indirect quote is the foreign currency price of the foreign country. b. A forward contract prevents upside gain. c. Gilt arises out of an action you cannot tell your parents about. d. If the market rate exceeds the cross rate, no-arbitrage is possible. e. The violation of interest rate parity motivates the activation of triangular arbitrage.arrow_forwardAssume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____. A. appreciate; appreciate B. depreciate; depreciate C. remain stable; appreciate D. depreciate; appreciate E. appreciate; depreciatearrow_forward
- Suppose £1=€1.28 in Paris, €1 =TL 9.30 in İstanbul, and £1 = TL 13 in London. ignoring transaction costs, are there any arbitrage profit for each currency initially traded? If yes prove at least two of them.arrow_forwardYou observe the following exchange rates at three different banks for the Australian dollar, Euro and New Zealand Dollar. X bank AUD 1.6650/EUR Y bank AUD 0.9213/NZD Z bank NZD 1.8955/EUR Assume you have AUD 1,000,000. Which of the following steps would you take to make a triangular arbitrage strategy? Note: the steps do not need to be in order. Tick all the steps that apply. A small penalty will be applied for each incorrect answer that is ticked. Sell AUD buy NZD Sell EUR buy AUD Sell AUD buy EUR Sell NZD buy EUR Sell NZD buy AUD There is no arbitrage opportunity in this case Sell EUR buy NZDarrow_forward
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