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Exchange Rates

B. What does the term arbitrage profits mean?
Use the following data in your responses to the remaining questions:

Selling Quotes for Foreign Currencies in New York

Canada - dollar (CAD) Spot 0.8450
30 day 0.8415
90 day 0.8390

Japan - yen (JPY) Spot 0.004700
30 day 0.004750
90 day 0.004820

Switzerland - franc (CHF) Spot 0.5150
30 day 0.5182
90 day 0.5328

f. An American business pays $20,000, $5,000, and $15,000 to suppliers in, respectively, Japan, Switzerland, and Canada. How much, in local currencies, do the suppliers receive?
g. Compute the indirect quote for the spot and forward Canadian dollar contract.


** Attached ** you will find the PDF document to some practice study problems that I am still trying to grasp and understand. These are the ones that I did not know how to do. Your help is greatly appreciated.

Chapter 17 of the text Foundations of Finance, by Keown

Comprehensive Mini Case Problem found in Chapter 17:

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** Please see attached file **

b. What does the term arbitrage profits mean?
"Arbitrage profit means making risk-less profit with zero net investment. One enters into two or more contracts simultaneously in order to benefit from any price discrepancies in these contracts and make risk-less profit. There is no net investment involved in this strategy since what is bought in one contract is sold in the other contract.
Example: Let the spot rate quotation in New York is 1.2650 USD / Euro and the spot rate quotation in Frankfurt be 0.8535 Euro / USD (USD= US dollar)
Now these prices are not in line with each other. 1 Euro can be bought for $1.2650 in New York while in Frankfurt 1 Euro can be exchanged for 1/0.8535 = 1.1716 ...

Solution Summary

Answers questions on exchange rates- indirect quote, payments etc.