Please attempt all for upvote ESTION 5 Ise the following inf

Please attempt all for upvote

ESTION 5 Ise the following information to answer the next two questions. ou observe the following quotes for Australian dollars from three banks. Find the maximum profit in terms of Canad an dollars) you can earn via locational arbitrage if you have access to C$25 million. Round intermediate steps to four decimals Bank X: C$ 9918-48 Bank Y C$.9955-68 Bank Z: C$.9928-50 O cs12,562.81 O cs50,261.36 O cs17,591.48 O o QUESTION 6 found in the previous question order ta The bid quote for Bank X must ?True O False increase in order to eliminate the arbitrage opportunity found in Save Al Answers

Solution

Q-5) The objective is to buy cheap and sell dear. Hence, buy AUD from Bank X and sell it to Bank Y. The profit would be 25000000*0.9955/0.9948 - 25000000 = 17591.48 Q-6) FALSE Q-2) The 1 year forward rate as per IRPT = 1(0.005*1.07/1.05) = 196.26 The rate given is the direct rate for Yen in terms of $, whereas correct answer the direct rate for $ in terms of Yen. Hence, reciprocal has been used. Q-3) The forward rate for $ in terms of Yen = 1/0.005 = 200 The forward discount = 198/(1/0.005)-1 = -1.00% The interest rate differential is 7%-5% = 2.00% Covered interest rate arbitrage is possible. As the interest rate differential is more than the forward discount, it would be profitable to borrow in the currency having lower interest rate and investing in the currency having higher interest rate. Hence, borrow in Yen and invest in $. For a hypothetical loan of Y1000, the maturity value of the loan would be 1000*1.05 = Y1050 On conversion to #, the amount to be deposited = 1000*0.005 = $         5.00 If, deposited the MV would be 5*1.07 = $         5.35 On conversion to Yen on maturity the amount = 5.35*198 = $ 1,059.30 Percentage return = 1059.30/1000 -1 = 5.9300% Q-4) Option: A decrease in the forward rate for dollars in terms of yen.