INDIVIDUAL ASSIGNMENT

IBF301_IB17B01_SU23

1. (2.5 marks) Assume you are a trader with Bank of America. From the quote screen
on your computer terminal, you notice that:

- Deutsche Bank is quoting S(€/$) = 0.7625 – 0.7628

- UBS is offering S(SFr/$) = 1.1780 – 1.1805
- HSBC is making a direct market between the Swiss franc and the Euro, S(Sfr/€)
= 1.5637 – 1.5649

Ignore transaction costs, do you have an arbitrage opportunity based on these quotes? If
there is an arbitrage opportunity, what steps would you take to make an arbitrage profit.
And how much would you profit if you have $1,000,000 to conduct the arbitrage.
 Answer:
- Ignoring transaction costs, I have an arbitrage opportunity based on these
quotes.
- Firstly, I have $1,000,000 and I want to trade arbitrage between currencies. I
will choose Deutsche Bank to start trading and buy € at the Ask price.
• $1,000,000 × 0.7628 = €762,800
- After that, I used my €762,800 to buy SFr at the Ask price of HSBC.
• €762,800 × 1.5649 = SFr1,193,705.72
- In the end, I exchanged SFr1,193,705.72 I had to convert to USD at the Ask
price of UBS.
SFr 1,193,705.72
• = $1,011,186.548
1.1805
- Finally ,after triangual arbitrage, my profit is:
• $1,011,186.548 - $1,000,000 = $11,186.548
2. (3.0 marks) Suppose that the current spot exchange rate is €0.8985/$ and the six-
month forward exchange rate is €0.9005/$. The six-month interest rate is 4.8 percent in
the United States and 4.5 percent in France. You can borrow at most $1,000,000 or the
equivalent €898,500, at the current spot exchange rate.
 a. Determine if IRP is holding between the United States and France
b. If IRP is not holding, explain in detail how you would realize certain profit in U.S
dollar term.
c. Explain how IRP will be restored as a result of covered arbitrate activities.
 Answer:
Vd
3. (2 marks) Study the website of the International Monetary Fund (IMF),
www.imf.org, and discuss the role of the IMF in dealing with currency crises.
 4. (2.5 marks)

Using the market data in the table, consider the PHLX 112 Jun EUR European call option.

a. Calculate the net terminal value of a long position at the following terminal
spot prices, cents per unit: 105, 110, 117, and 120. Ignore any time value of money
effect.
b. Show graph of 111 Jun EUR Call option of long position.