You are a hedge fund looking for arbitrage opportunities between the spot FX market and 6 month FX forwards and money markets. You observe the following quotes from market makers in these markets for South African Rand (ZAR) and US dollars (USD): Bid Ask S(ZAR/USD) 15.845 15.849 F6m(ZAR/USD) 15.865 15.880 ZAR USD At these prices: 6m Lending Rate 6m Borrowing Rate 0.98%pa 1.12%pa 0.40%pa 0.50%pa You can make an arbitrage profit because the FX forward bid is too high by approximately 0.1. The arbitrage trade involves you borrowing ZAR in six month money markets. You can make an arbitrage profit because the FX forward ask is too low by approximately 0.04. The arbitrage trade involves you lending ZAR in six month money markets. You can make an arbitrage profit because the FX forward ask is too low by approximately 0.003. The arbitrage trade involves you lending ZAR in six month money markets. You can make an arbitrage profit because the FX forward bid is too high by approximately 0.04. The arbitrage trade involves you borrowing ZAR in six month money markets. None of the other answers.
Added by Jose Carlos J.
Close
Step 1
Using the given rates, we have: F = 15.849 * (1 + 0.004) / (1 + 0.0112) = 15.849 * 1.004 / 1.0112 = 15.865 The calculated forward rate (15.865) is the same as the quoted forward rate (15.865), so there is no arbitrage opportunity based on the forward rate. Show more…
Show all steps
Your feedback will help us improve your experience
Yujie Wang and 78 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
Explain the term arbitrage opportunity and their relationship in the context of single period markets and describe a condition in terms of risk neutral probability measure for the absence of arbitrage opportunities. Consider the following discrete one-step market model where there is one risk-less asset whose values are A(0) = 1 and A(1) = (1 + r) and one risky asset whose price S(t) at time t = 0 is given by S(0) = 1 and the prices at time t = 1 are given by S(1) = a or S(1) = b with b < a. What are the conditions on a, b and r so that there is no arbitrage? Explain your answer. Consider the following discrete one-step market model where there is one risk-less asset whose values are A(0) = 1 and A(1) = (1 + r) and one risky asset whose price S(t) at time t = 0 is given by S(0) = 1 and the prices at time t = 1 can take the following values: S(1) = (1 + a), (1 + b), or (1 + c) with a < b < c. Describe the risk neutral probability measures. Suppose we have a call option taking three different values Ca, Cb and Cc. In general, can we find a replicating portfolio? Explain your answer.
Sri K.
Akash M.
Using market information as of the close of Tuesday, August 30 (see WSJ online), address the following questions regarding the Platinum futures contract, which is listed on the CME Group futures exchange. Assume the "Platinum, Engelhard industrial bullion" price is a reasonable proxy for the spot (cash) price. Assume that the maturity date of this futures is the 3rd last business day of the maturity month. Of the various Libor maturities reported (e.g., 1, 3, 6, or 12 months), use the maturity most closely matching that of the futures maturity date--but when computing the financing cost, please be sure to use an actual day count and a 360-day year (i.e., use the "Actual/360" day count convention). Also, assume warehousing and delivery costs are negligible and ignore for now convenience yields and leasing opportunities. (A) Determine the theoretical futures price ($ per ounce) for the January 2023 Platinum futures contract. (Hint: the 3-month Libor rate is probably the closest in maturity.) (B) i) Compare the actual reported futures price to your answer in (A); and ii) If the actual and theoretical futures prices differ, explicitly detail the steps for conducting an arbitrage and compute the potential arbitrage profit (per ounce). (C) Discuss factors that could potentially explain how an "apparent" arbitrage opportunity may have arisen in part B.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
Watch the video solution with this free unlock.
EMAIL
PASSWORD