MINISTRY OF EDUCATION AND TRAINING

FPT UNIVERSITY
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INDIVIDUAL ASSIGNMENT

Lecturers: Nguyen Thi Bich Thuong

Class: IB17B
Name: Dang Tieu Chau Linh
Student ID: QS170026

Quy Nhon, ......, 2022

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?

I have an arbitrage opportunity based on these quotes.

4 steps I would take to make an arbitrage profit:

Step 1: Sell $1,000,000 to Dresdner Bank and realize €762,500 ($1,000,000*0.7625).

Step 2. Sell €762,500 for Swiss Francs to HSBC and realize SF1,192,321.25(€762,500 *1.5637 ).

Step 3. Resell SF1,192,321.25 to UBS for $1,010,013.7654(SF1,192,321.25 *(1/1.1805)).

Step 4. Make a triangular arbitrage profit of $10,013.7654($1,010,013.7654- $1,000,000 ).

2. (3.0 marks) Suppose that the current spot exchange rate is €0.8985/$ and the sixmonth 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.

a.

S($/€)= 1/ 0.8985= 1.1130

F($/€)= 1/ 0.9005= 1.1105

1+ i$= 1+ 4.8%/2= 1.024 áp dụng dô bài mình 1+ i$=1+3.0%/2= 1.015

F/S*(1+ i€)= (1.1105/ 1.1130)*(1+ 4.5%/2)= 1.0202 áp dụng dô bài mình F/S*(1+ i€)= (1.7900/
1.7650)*(1+ 2.8%/2)= 1.031

Because 1+ i$≠F/S*(1+ i€)

 IRP is not holding between the United States and Australia

b. Because 1+ i$>F/S*(1+ i€), we must invest in the United States

Step 1: Borrow €898,500 and repay €918,716.25 (€898,500 *(1+ 4.5%/2)) in six months

Step 2: Sell €898,500 spot for $1,000,000 (898,500 /0.8985).

Step 3: Invest $1,000,000 for six months and receive $1,024,000 (1,000,000 *(1+ 4.8%/2)) at maturity.

Step 4: Sell $1,024,000 forward for €922,122 (1,024,000*0.9005)

Arbitrage profit = €922,122 - €918,716.25 = €3,395.75

c. Explain how IRP will be restored as a result of covered arbitrate activities.

Borrow € => i€ increase

Invest $ => i$ decrease

S($) appreciate

F($) depreciate

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.