arbitrage

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Slide 1: 

The Dollar price pound is Usd.1.98 in new york and Usd. 2.01 in London. An arbitrager has purchased one million pounds at usd.1.98 in new york and sold immediately in london at Usd.2.01. Calculate the profit. Usd. Purchase Price = 2.01 Selling Price = 1.98 Profit = 0.03 No. of pounds purchased = 10,00,000 Total Profit = 30,000

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Triangular arbitrage Three currencies are involved. Example: 2 Dollars = One pound in New York 0.2 Pounds = 1 Denmark 2.5 Den marks = one dollar in Frankfurt

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One dollar is equal to 47 Expressed as 1/47 = 0.0212

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US Dollar Rate = 45.79/99 The lower rate in quotation is Bid (Buy)The higher rate in quotation is Ask (Selling)

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Spot Rate=Rs.42.0010 per Dollar 6 months forward rate = Rs.42.8020 Annualized interest rate on 6 month Rupee=12 % Annualized interest rate on 6 month Dollar=9% Calculate the arbitrage opportunities

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Interest Rate Differential = 12-8 = 3% Forward premium (Annualized) Assess interest arbitrage opportunity. Forward Rate – Spot Ratex100x12 Spot Rate 6 42.8020 – 42.0010x100x12 42.0010 6 3.8141% Negative interest rate differential > forward premia. There is a possibility of arbitrage inflow in India.

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The buying rate for deutschemark spot in New York is usd. 0.40 What would you expect the price of US Dollar to be in Germany,If the Dollar is quoted in Germany at DM2.60, how is market supposed to react? DM Spot = 1/0.40 = 2.5 If 2.6 DM/dollar in Germany, market buys dollars in New York @ 2.5 DM and sells dollars in Germany at 2.6DM. This arbitrage increase demand for dollars in NY and appreciate dollars and value will rise to 2.6 DM to Dollar

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On the same date the DM spot was quoted $0.40 in New York, the price of the pound sterling was quoted $1.80 What would you expect the price of pound in Germany If the pound is quoted in Frakfurt at DM 4.40 per pound what would you do to profit from the situation? 1DM = $0.40 1 Pound = $1.80 1/0.40 DM=1/.80 Pounds 1Pound = 1.80/0.40 DM=4.5 DM Buy at DM 4.4 in Frankfurt, use them and sell in NY for Usd.1.80. With 1.80 buy 4.5 DM. Hence the arbitrager will profit 0.1 DM for every 4.40 DM.

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You have called your foreign exchange trader and asked for quotations on the spot, one month & three months. The trader was responded with the following: $0.02479/81 What does this mean in terms of dollars per euro? Bid Ask 1 Month $0.2479 0.2481

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From the below information determine the decrease in book value of assets. Current exchange rate $1 = Rs. 47.10 Assets Liabilities Rs. 15,300,000 Rs. 15,300,000 In the next period, the exchange rate fluctuates to $1 = Rs 47.50 Determine the decrease in Book Value of the assets in dollars.

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