Share
Explore BrainMass

Forward Market and their Motives; Profitable Arbitrage

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

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 ...

Solution Summary

Forward market and their motives profitable arbitrage are examined.

$2.19