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# Risk managment : arbitrage profits in currency exchanges

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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?

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?

h. You own \$10,000. The dollar rate in Tokyo is 216.6752. 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?

i. Compute the Canadian dollar/yen spot rate from the data in the preceding table.

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#### Solution Preview

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Problem set 2
Risk management problems
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?

The Tokyo rate is 216.6743 Yen/\$
The (indirect) New York rate is 1/.004684 = 213.4927 Yen/\$.
Assuming no transaction costs, the rate between Tokyo and New York are out of line. Arbitrage profits are possible.
Yen is cheaper ...

#### Solution Summary

The solution explains how to find out if any arbitrage opportunities are available in currency exchange

\$2.19

## Financial management: Discuss arbitrage profits, exchange risk, forward contract, futures, options

For your job as the business reporter for a local newspaper, you are given the assignment of putting together a series of articles on the multinational finance and the international currency markets for your readers. Much recent local press coverage had been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm. Your editor would like you to address several specific questions dealing with multinational finance.

Prepare responses to problems 1-4:

1. What new problems and factors are encountered in international as opposed to domestic financial management?

2. What does the term arbitrage profits mean?

3. What can a firm do to exchange risk?

4. What are the differences between a forward contract, a futures contract, and options?

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