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Homework answers / question archive / L QUESTION 4 (UNIT 2) (25 MARKS) a) Assume the following information: Bank Bid Price of New Ask Price of New Zealand Dollar Zealand Dollar JP Morgan Bank USD0

L QUESTION 4 (UNIT 2) (25 MARKS) a) Assume the following information: Bank Bid Price of New Ask Price of New Zealand Dollar Zealand Dollar JP Morgan Bank USD0

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L QUESTION 4 (UNIT 2) (25 MARKS) a) Assume the following information: Bank Bid Price of New Ask Price of New Zealand Dollar Zealand Dollar JP Morgan Bank USD0.6533 USDO.6563 Well Fargo USD0.6503 USDO.6523 Justify whether locational arbitrage is possible. If so, explain the steps involved in locational arbitrage, and estimate the profit from this arbitrage if you had USD1,000,000 to use. Discuss market forces factors that would occur to eliminate any further possibilities of locational arbitrage. (6 marks) b) Quoted Price USDO.7381 Currency Pair Value of Canadian Dollar (CAD) in US Dollars (USD) Value of New Zealand Dollar (NZD) in US Dollars (USD) Value of Canadian Dollar in New Zealand Dollars (NZD) USDO.6537 NZD1.1305 Referring to the information given, explain the steps that would reflect triangular arbitrage. If you had USD2,500,000 to use in triangular arbitrage, compute the profit from this strategy. Justify the steps taken to prevent any further possibilities of triangular arbitrage. (7 marks) Given the following information, calculate the yield (percentage return) to a U.S. investor who used covered interest arbitrage. Assume the investor invests USD2,000,000 determine the profit or loss in this transaction. You are required to analyse the market forces determinants occur in order to protect from any further possibilities of covered interest arbitrage. c) Currency pairs and Interest Rate Spot Rate of Canadian Dollar (CAD) 90-day forward rate of Canadian dollar 90-day Canadian interest rate 90-day U.S. interest rate Quoted Price USDO.7381 USDO.7252 3.25% 1.75% (8 marks) - d) Assume that interest rate parity exists. You expect that the one-year nominal interest rate in the U.S. is 1.995%, while the one-year nominal interest rate in Australia is 3.695%. The spot rate of the Australian dollar is USD0.6939. You will need 15 million Australian Dollars in one year. Today, you purchase a one-year forward contract in Australian Dollars. Estimate how many U.S. Dollars (USD) will you need in one year to fulfill your forward contract. (4 marks)

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