$ 1.0810 – $ 1.

0790
$ 1.0810
∗100 = 0.1850%

€: $1.50
£: $2.00
£: €1.3333 observed rate £: €1.3500
$100,000
$ > GBP > Euro > $
$100,000 to the GBP: £50,000
£50,000 to Euro: €67,500
€67,500 to USD: $101,250
€: $1.50
£: $2.00
£: €1.3333 observed rate £: €1.3000
$ > Euro > GBP > $
$100000 to Euro: Euro 66,667
Euro 66,667 to GBP: GBP 51,283
GBP 51,283 to USD: $102,565

6-month Forward contract on the GBP (GBP 10 million); the

forward rate is $1.30/GBP
 Expiration A date
 or SHORT Size or amount of the foreign currency
  The forward rate
 The position: LONG

After 6 month the spot rate = $1.20/GBP

The short would obtain GBP from the market @$1.20/GBP and
sell to the long @ $1.30/GBP.
[$1.30 -$1.20]*10,000,000 = $1,000,000
F–S $ 1.90−$ 1.95
P= ∗100= ∗100=−2.56 %
S $ 1.95

The current spot exchange rate is $1.95/£ and the three-month forward rate is
$1.90/£. On the basis of your analysis of the exchange rate, you are pretty confident
that the spot exchange rate will be $1.92/£ in three months. Assume that you would
like to buy or sell £1,000,000.
a. What actions do you need to take to speculate in the forward market? What is
the expected dollar profit from speculation?
[$1.92-$1.90]*1,000,000 = $20,000

The position based on the belief that GBP’s value in the spot market after 3 months
will be $1.92/£: LONG position.
The expected profit = [$1.92 - $1.90] *1,000,000 = $20,000

b. What would be your speculative profit in dollar terms if the spot exchange rate
actually turns out to be $1.86/£?
The profit = [$1.86 - $1.90] *1,000,000 = -$40,000
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:
Swiss franc/dollar = SFr1.5971/$
Australian dollar/U.S. dollar = A$1.8215/$
Australian dollar/Swiss franc = A$1.1440/SFr

Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity

based on these quotes? If there is an arbitrage opportunity, what steps would
he take to make an arbitrage profit, and how much would he profit if he has
$1,000,000 available for this purpose?

The efficient rate of the SFr in terms of the A$ = 1.8215/1.5971 = A$ 1.1405/SFr

$1,000,000 to the overvalued currency (SFr)
SFr would be converted into the A$
A$ would be converted into the $