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  •  Nguyễn Võ Hà Phương  Trần Thụy Yến Thu  Nguyễn Bảo Ngọc  Nguyễn Thụy Thùy Dung  Nguyễn Thụy Hà Giang

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    Lan Yen
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    Group 18 presents an arbitrage opportunity between the interest rate parity (IRP) and 1-year forward rate in Vietnam. The IRP is 5.98% while the 1-year forward rate is -0.51%, indicating an arbitrage opportunity. The group then outlines a covered interest arbitrage strategy to exploit this. They would borrow $1000 at the US rate and deposit the VND equivalent at the higher Vietnamese rate. A 1-year forward contract is used to lock in the exchange rate. This guarantees a riskless profit equal to the difference between the IRP and forward rate.

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    IFM - NHOM 18

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    Group 18 presents an arbitrage opportunity between the interest rate parity (IRP) and 1-year forward rate in Vietnam. The IRP is 5.98% while the 1-year forward rate is -0.51%, indicating an arbitrage opportunity. The group then outlines a covered interest arbitrage strategy to exploit this. They would borrow $1000 at the US rate and deposit the VND equivalent at the higher Vietnamese rate. A 1-year forward contract is used to lock in the exchange rate. This guarantees a riskless profit equal to the difference between the IRP and forward rate.

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    10 views2 pages

     Nguyễn Võ Hà Phương  Trần Thụy Yến Thu  Nguyễn Bảo Ngọc  Nguyễn Thụy Thùy Dung  Nguyễn Thụy Hà Giang

    Uploaded by

    Lan Yen
    Group 18 presents an arbitrage opportunity between the interest rate parity (IRP) and 1-year forward rate in Vietnam. The IRP is 5.98% while the 1-year forward rate is -0.51%, indicating an arbitrage opportunity. The group then outlines a covered interest arbitrage strategy to exploit this. They would borrow $1000 at the US rate and deposit the VND equivalent at the higher Vietnamese rate. A 1-year forward contract is used to lock in the exchange rate. This guarantees a riskless profit equal to the difference between the IRP and forward rate.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 2

    Group 18

     Nguyễn Võ Hà Phương
     Trần Thụy Yến Thu
     Nguyễn Bảo Ngọc
     Nguyễn Thụy Thùy Dung
     Nguyễn Thụy Hà Giang

    Homework
    1. Explanation of arbitrage opportunity:
    To earn an arbitrage opportunity, we must consider the different between IRP and
    Forward Premium
    -IRP (in 2017) = ih – if = 6.5% - 0.52% = 5.98%
    F−S 22710−22593
    -Forward Premium (1year forward contract) = = = -0.51%
    S 22593
    The absolute value of IRP is higher than absolute value of Forward Rate so the point will
    not belong to IRP line. Thus, there is an arbitrage opportunity

    H (5.98 ; -0.51)

    2. Arbitrage Strategy
    Basing on the date and explanation, we will use Cover Interest Arbitrage
    -Interest Arbitrage: On January 1s t 2017, we borrow $1000 and convert into VND
    22,539,000 to deposit in Vietnamese Bank at 6.5% interest rate. Then we sign a 1 year
    forward contract of buying $1005.2 at VND 22,828,092
    -Covered Hedging: On January 1s t 2018, we will receive VND 24,004,035 (100%
    deposit and 6.5% interest payment). Then we use the forward contract to pay $1005.2 at
    VND 22,828,092

    Thus, Return after arbitrage is: 24,004,035 – 22,828,092 = VND 1,175,943

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