FIN542 Revision Questions

Coverage Interest Arbitrage

FEB2021 Question 2(a)
According to the following exchange rates quoted in Malaysia:
Spot rate MYR5.4600/40/GBP
6-month forward MYR5.4820/60/GBP
Malaysia interest 7 percent per annum
United Kingdom interest 5.5 percent per annum

Based on the above information, compute the profit from covered interest arbitrage if
an investor has GBP 1 million.
(10 marks)

FEB2022 Question 2(a)

The spot rate is RM4.1900/46/USD, and the one-year forward rate is
RM4.2800/64/USD. The interest rate in the United States is 4 percent and in Malaysia is
5 percent per annum. If interest rate parity (IRP) is not holding, show your covered
interest arbitrage steps and profit. Assume you can borrow as much as RM544,000.
(10 marks)
The spot rate is RM4.1900/46/USD, and the one-year forward rate is
RM4.2800/64/USD. The interest rate in the United States is 4 percent and in Malaysia is
5 percent per annum. If interest rate parity (IRP) is not holding, show your covered
interest arbitrage steps and profit. Assume that you have USD 150,000 for the
transaction.
July 2021 Question 2(a)
Given are the several economic data related to the parity condition of Malaysia
and Japan:
Spot rate MYR3.6174/JPY100
One year forward rate MYR3.7500/JPY100
Annual interest (MYR) 10.3 percent
Annual interest (JPY) 7.3 percent

i) Justify whether interest rate parity is at equilibrium or disequilibrium.

(3 marks)
ii) Compute the profit in Japanese Yen if an arbitrager initially invests
MYR60million.
Triangular Arbitrage
FEB 2021 Question 1(b)

Gabrielle is an investment executive in her company. She noticed that there could be an
arbitrage opportunity after monitoring the foreign exchange market. The spot rate
quoted in Malaysia are MYR4.0510/30/USD and MYR3.0630/50/AUD. From her
observation, the spot rate quoted in Australia foreign exchange market is
AUD1.3320/50/USD. Determine the profit Gabrielle can earn if she performs triangular
arbitrage with an initial investment of MYR 1 million.

JUL 2021 Q1(b)

The following information is available in the market today:
Currency
Quoted Price
Currency Quoted Price
Value of 100 yen in US dollar 0.9550-60
Value of 100 yen in Canadian dollar 1.2410-30
Value of US dollar in Canadian dollar 1.3370-80

If you have one million yen, explain the steps that would reflect the triangular
arbitrage. (8 marks)

Options
Assume that a put option on USD is written with a strike price of MYR4.7345/USD premium
of MYR0.0650/USD and with expiration date of 6 months from now. The option is
USD125,000.
(a) You are required to determine whether you should exercise the option if the USD is
traded at spot rate of

(I) MYR 4.8213/USD (3

marks)

(II) MYR 4.6522/USD (3

marks)

(b) Determine the spot price at expiration date if the option is at the money status.
(1 mark)