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##### FINANCE 680 PROBLEM SET 2 Fall 2014 - GLOBAL FINANCE

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Question;1. LOCATIONAL ARBITRAGE:The following quotes for the Brazilian Real (US \$ per Br. Real) are available in two different banks:Bank X Bank YBid \$0.40/Br. Real \$0.4120/Br. RealAsk \$0.4050/Br. Real \$0.4210/Br. RealYou have 1 million dollars. Outline the strategy and the profit from locational arbitrage.2. TRIANGULAR ARBITRAGE:The following quotations are available to you:Observed or Market quotes:Mexican Peso 13.50 per US \$Euro 0.7937 per US \$# Of Pesos per Euro: 18.15 Pesos per euroIs triangular arbitrage feasible? If you have 1 million \$, explain the steps and compute the profit.At what cross-rate, triangular arbitrage will NOT be feasible or profitable?Peso: 13.50 x \$1,000,000 = 13,500,000Euro = \$1,000,000 x.7937 = 793700Peso per Euro =3. COVERED INTEREST ARBITRAGE (CIA):Assume you are a USA investor & you have 1 million US \$. The 90-day interest rate in Mexico is 3 % and the 90-day U. S. rate is 0.25%. The spot rate is 13.5 Pesos to the dollar and the 90-day forward rate is 12.95 Pesos to a dollar. If the USA investor engages in CIA, will it be profitable? Outline the steps and show the results.4. INTEREST RATE PARITY:Based on the following information, indicate if the US interest rate should be higher, lower, or equal to the Euro Region interest rate, please be sure to show all the steps.Show all your steps!Spot Forward US Interest Rate (Just indicate or SIMPLYSTATE Higher, Lower, Same etc.)\$1.2620/Euro \$1.2300/Euro ?\$1.2620/Euro \$1.2620/Euro ?\$1.2620/Euro \$1.2850/Euro ?5. PURCHASING POWER PARITY:Consider the following information:USA EuropeInitial Inflation (i=0) 0% 0%Final Inflation (i=+1) 2% 5%Initial Exchange rate ofthe Euro (i=0) \$1.25/Euro Final Exchange rate ofthe Euro (i=+1) \$1.20/EuroIs there purchasing power parity? Why or why not? From the perspective of the US firm, where would it be cheaper to buy the goods?6. COVERED INTEREST ARBITRAGE:Given the following:US 90-day interest rate 0.25%Canadian 90-day interest rate 0.95%Current spot rate US \$1.12/C \$90-day forward rate US \$1.16/C \$If you have \$1 million and would like to engage in covered interest arbitrage (CIA).i) Outline the steps for CIA with the appropriate computation thereof and compute the profit.ii) Compute the return on investment of \$1 million and identify its components.iii) For Interest rate Parity to prevail, what should be the forward rate?

Paper#48518 | Written in 18-Jul-2015

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