IBF Test 3 - Test 3 PDF

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Test 3...

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LUBS 3620 INTERNATIONAL BUSINESS FINANCE TEST THREE 1.

2.

3.

Assume you are a trader with Deutsche Bank. You notice that Dresdner Bank is quoting €1.0242/$ and Credit Suisse is offering SF1.5030/$. You also learn that UBS is making a market between the SF and € at €0.6750/SF. (a)

Assuming you have $5m at your disposal, show how you can make a triangular arbitrage profit by trading at these prices.

(b)

Show the result if you initially sell $ for SF.

(c)

Calculate the €/SF price that would eliminate triangular arbitrage opportunities.

The 3 month forward rate is currently $1.50/£. Based on your analysis of the exchange rate, you are pretty confident that the spot exchange rate will be $1.52/£ in 3 months’ time. Assume you want to speculate on the $/£ spot rate by buying or selling £1m in the forward market. (a)

Explain how you could speculate in the forward market and calculate your expected $ profit from speculation.

(b)

Calculate your speculative $ profit if the spot exchange rate actually turns out to be $1.46/£.

As a foreign exchange arbitrageur, you are presented with the following three exchange rates posted by three different banks: HSBC offers a spot rate of €1.6230/$ UBS offers a spot rate of SF1.4260/$ Dresdner offers a spot rate of €1.1250/SF (a)

Calculate the implied cross exchange rate between € and SF.

(b)

Explain why an arbitrage opportunity exists in this situation.

(c)

Explain how you could benefit from this arbitrage opportunity and calculate your riskless profit if you had $100,000 at your disposal.

(d)

Explain your riskless arbitrage profit opportunity in terms of the principle of ‘buy low and sell high’....