I solved these two questions, and I have to put them on the picture graph below,
ID: 2614761 • Letter: I
Question
I solved these two questions, and I have to put them on the picture graph below, but I don't understand them.I'd appreciate it if you let me know.Examples of International financial arbitrage EX1: Heidi Høi Jensen, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with Denmark. Using the following quotes can Heidi make interest arbitrage profit? Assumptions Arbitrage funds available Spot exchange rate (kr/S) 3-month forward rate (kr/S) US dollar 3-month interest rate Danish kroner 3-month interest rate Value $5,000,000 6.1720 6.1980 3.000% 5.000%
Explanation / Answer
Answer 1
let Heidi borrow $50,00,000
current spot rate 1$ = 6.1720kr
then convert it in Kr = 50,00,000*6.1720 = 3,08,60,000 kr
and invest it for 3 moths and received 3,08,60,000*1.05 = 3,24,03,000
and 3 month forward rate is 1$ = 6.1980 kr
then convert it in dollar therefore $ received is 3,24,03,000/6.1980 = 52,27,976.77$
and payment of borrowed funds is 50,00,000(1.03) = 51,50,000$
therefore net arbitrage gain is 5227976.77 - 51500000 = 77,975.77$
Answer 2
Take a loan of $ 10,00,000
and convert it in Euro and receives 10,00,000*.80 = 8,00,000 Euro as current spot rate is 1$ = 0.80Euro
and then invest these Euro is France
interest in France p.a is 5.60% therefore for 3 months is 5.60/4 = 1.40%
and receives after 8,00,000(1.014) = $811200
and then convert is in $ = 811200/0.7813 = $1038269.55
and payment of borrowed funds of $ = 10,00,000(1.0135) = 10,13,500
and saved dollar is 1038269.55 - 1013500 = 24769.55$
and convert is in Euro = 24769.55*.7813= 19352.449 Euro
that is our arbitrage gain