Forward Market and their Motives; Profitable Arbitrage
Not what you're looking for?
1. Who are the principal users of the forward market? What are their motives?
2. Suppose the euro is quoted at 0.6786-98 in London, and the pound sterling is quoted at 1.4724-70 in Frankfurt. Is there a profitable arbitrage situation? Describe it.
3. On checking the Reuters screen, you see the exchange rate and interest rate quotes below. Can you find an arbitrage opportunity? What steps must you take to capitalize on it? What is the profit per $1,000,000 arbitraged?
Currency 90-Day Interest Rates Annualized Spot Rates 90-Day Forward Rates
Dollar 4.99% - 5.03%
Swiss franc 3.14% - 3.19% $0.711-22 $0.726-32
Please show all calculations
Purchase this Solution
Solution Summary
Forward market and their motives profitable arbitrage are examined.
Solution Preview
1. Who are the principal users of the forward market? What are their motives?
The principal users of the forward market are currency arbitrageurs, hedgers, importers and exporters, and speculators.
Arbitrageurs wish to earn risk-free profits.
Hedgers, importers and exporters want to protect the home currency values of various foreign currency-denominated assets and liabilities.
Speculators actively expose themselves to exchange risk to benefit from expected movements in exchange rates.
2. Suppose the euro is quoted at 0.6786-98 in London, and the pound sterling is quoted at 1.4724-70 in Frankfurt. Is there a profitable arbitrage situation? Describe it.
There are two alternatives:
a) You start with £1000 and you use ...
Purchase this Solution
Free BrainMass Quizzes
Organizational Behavior (OB)
The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.