Explore BrainMass
Share

Forward Market and their Motives; Profitable Arbitrage

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

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

© BrainMass Inc. brainmass.com October 25, 2018, 5:53 am ad1c9bdddf
https://brainmass.com/business/foreign-exchange-rates/forward-market-motives-profitable-arbitrage-438707

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
See Also This Related BrainMass Solution

Outline for Capital Budgeting Paper

I have a 15 - 20 page literature review to write that captures relevant theories and empirical research leading to a significant research topic, problem, and research question(s).

I need a 2 page outline to help me write a good literature review on "Capital Budgeting and Long-Term Financing"

I have attached the relevant articles that i intend to use for the literature review but feel free to include other sources as you deem necessary.

View Full Posting Details