Based on the above information, is there any arbitrage opportunity? If yes, what should the commercial bank do to capture this arbitrage opportunity? If not, why? Explain. b) Suppose the commercial bank has the ability to “move” the market (i.e., affecting the spot exchange rate, the forward exchange rate, and the returns on bonds in both countries), what happens to these variables after the transactions carried in part (a)? Explain. c) Instead of affecting the interest rates and the 180-day forward rate, suppose the spot exchange rate bears all the burden of adjustments, find the US$/€ spot rate that would eliminate interest arbitrage
Suppose you obtain the following quotes:
Foreign exchange market:
Spot rate: SUS$/€ = 1.0623
180-day Forward rate: F180US$/€ = 1.0765
RUS$ = 5.75% p.a.
R€ = 4.25% p.a.
Note: Keep your answers to 4 decimal points if necessary.
a) Based on the above information, is there any arbitrage opportunity? If yes, what should the commercial bank do to capture this arbitrage opportunity? If not, why? Explain.
b) Suppose the commercial bank has the ability to “move” the market (i.e., affecting the spot exchange rate, the forward exchange
c) Instead of affecting the interest rates and the 180-day forward rate, suppose the spot exchange rate bears all the burden of adjustments, find the US$/€ spot rate that would eliminate interest arbitrage
Step by step
Solved in 4 steps
