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Making Profit by an Arbitrage Opportunity

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Suppose that the current spot exchange rate is USD/SKR6.25 and the three-month forward exchange rate is USD/SKR6.28. The three-month interest rate is 5.6% per annum in the U.S. and 8.8% per annum in Sweden. Assume that you can borrow up US to $1,000,000 or SKR 6,250,000. Can you generate arbitrage profits? Show your profits both in USD and SKR terms.

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This solution depicts the steps to calculate the profit in case of an arbitrage opportunity in a step-by-step manner.

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Sport exchange rate=S=6.25 SKR/US$
Forward exchange rate=F=6.28 SKR/US$
3 month interest rate in US=iu=5.6%/4=1.4%
3 month interest rate in ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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