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Arbitrage

1) COUNTRY CONTRACT $/FOREIGN CURRENCY
New Zealand?dollar Spot 0.3893
30-day 0.3910
90-day 0.3958

ST-1. You own $10,000. The U.S. dollar rate on the New Zealand dollar is 2.5823 NZ$/US$. The New Zealand dollar rate is given in the accompanying table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?

The data for Study Problems 17-5 are given in the following table:
COUNTRY CONTRACT $/FOREIGN CURRENCY
Canada?dollar Spot 0.8437
30-day 0.8417
90-day 0.8395
Japan?yen Spot 0.004684
30-day 0.004717
90-day 0.004781
Switzerland?franc Spot 0.5139
30-day 0.5169
90-day 0.5315

17-5. (Exchange rate arbitrage)You own $10,000. The dollar rate in Tokyo is 216.6743. The yen rate in New York is given in the preceding table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?

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Chapter 17 of the text Foundations of Finance, by Keown

a. Problem ST-1: Self Test Problem

b. Problem 17-5: Study Problem

** See ATTACHED file for details... **

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** Please see attached file for complete solution **

Self-Test Problem
The data for Self-Test Problem ST-1 are given in the following table:

COUNTRY CONTRACT $/FOREIGN CURRENCY

New Zealand-dollar Spot 0.3893
30-day 0.3910
90-day 0.3958

ST-1. You own $10,000. The U.S. dollar rate on the New Zealand dollar is 2.5823 NZ$/US$. The New Zealand dollar rate is given in the accompanying table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?

Spot rate is the rate at which we can buy or sell a currency for immediate delivery

We can buy/sell New Zealand dollar in New Zealand at the rate of 1 US dollar = 2.5823 New Zealand dollar

We can buy/sell New Zealand dollar in US at the rate of 1 New Zealand dollar = 0.3893 US dollar
Or ...

Solution Summary

Sets up arbitrage schemes, given exchange rates.

$2.19