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leonid [27]
3 years ago
9

If an arbitrageur can borrow up to $1,000,000 (or CD1,250,000), formulate a covered interest arbitrage. Make sure to explain you

r steps in detail (just writing out three random calculations does not count). Determine the amount of arbitrage profit.
Business
1 answer:
scoundrel [369]3 years ago
6 0

Answer:

Here is the complete question:

Covered Interest Arbitrage: Suppose that you’re a FX trader for a bank in New York. You are faced with the following market rates:

Spot exchange rate: ¥110.55/$.

1 year dollar interest rate = 1.50%

1 year yen interest rate = 0.25%

1 year forward exchange rate: = ¥108.15/$.

Assume that you may borrow up to $1,000,000 (or its equivalent in yen) to engage in this arbitrage. Show all calculations as you respond to the questions below.

a) Is there an arbitrage opportunity? Explain with calculations why or why not. (10 points)

b) Spell out the actions you would take to profit from this situation. (30 points)

Which currency would you borrow and what amount?

Which currency would you lend (invest) and what amount?

What is the forward transaction you would engage in? State clearly the currency you would sell forward, the currency you would buy forward, and the respective amounts.

Calculate your arbitrage profits, either in US dollars or in Japanese yen.

Explanation:

) Interest rate differential = 1.5 - 0.25 = 1.25%.

   Discount rate of $ = (110.55 - 108.15)110.55 = 2.17%.

Since the interest rate differential and the discount rate in the forward rate are different, there is opportunity for covered interest rate arbitrage.

b) Actions:

Borrow $1,000,000 @ 1.5% interest; the loan amount + interest to be repaid at the end of the year being $1,015,000.

Convery the $1,000,000 to Y at the spot rate of 110.55 and get 110,550,000Y

Deposit it for 1 year to get Y110,550,000*1.0025 by the end of the year. = 110,826,375Y

Sell forward y110,826,375 at 108.15/$, to get 110,826,375/108.15 = 1,024,746.88$

After 1 year get the proceeds of the deposit of 110,826,375Y, convert it to $ at the forward rate of 108.15, and get 1,024,746.88$.

Then close the $ borrowing by paying $1,015,000.

Balance left = 1,024,746.88 - 1,015,000 = $9,746.88--arbitrage profits

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When someone like Kelsie blames Steve for all her shortcomings at work even though he is the hardest working member on the team, it is an example of political workplace deviance. Therefore, the option B holds true.

<h3>What is the significance of workplace deviance?</h3>

Workplace deviance can be referred to or considered as the tendency of an employee or a member of an organization to intentionally cause a sense of harm to the regular functioning of the organization.

A political deviance is a type of workplace deviance wherein an employee in higher authority starts blaming others for slightest of irregularities in the team.

Therefore, the option B holds true and states regarding the significance of workplace deviance.

Learn more about workplace deviance here:

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The missing options to the question are added below for better reference.

A. group deviance

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Delivering bad news within an organization might involve sharing bad news with your boss or another employee in person or in wri
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In order to be tactful and professional when personally delivering bad news within organizations, you should prepare and rehearse. Before delivering bad news you need to make sure you have gathered all the information from both sides of the story in order to deliver the news tactfully and professionally. Once you have all the information, rehearsing your delivery will allow you to perfect it and implement a more empathetic approach. Taking a partner is also a good choice, as well as waiting for the right moment.

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Answer: The offer should be rejected.

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Variable cost per unit :

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