Q50025 Given the following information :

Given the following information :

Exchange rate-            Canadian Dollar 0.665 per DM (Spot)

Canadian Dollar 0.670 per DM (3 months)

Interest rates               -DM 7% p.a.

Canadian Dollar 9% p.a.

What operations would be carried out to earn the possible arbitrage gains?

Solution

spot            $ / DM       0.665

3mf            $ / DM       0.670

i$                                   9%pa

iDM                               7%pa

Given the following information :

Exchange rate-            Canadian Dollar 0.665 per DM (Spot)

Canadian Dollar 0.670 per DM (3 months)

Interest rates               -DM 7% p.a.

Canadian Dollar 9% p.a.

What operations would be carried out to earn the possible arbitrage gains?

spot            $ / DM       0.665

3mf            $ / DM       0.670

i$                                   9%pa

iDM                               7%pa

Step 1 :     Borrow 10,000 CD for 3 months

Amt : payable = 10,000 x 1.0225 CD = 10225 CD

Step 2 :     Convert CD 10,000 in DM spot

Amount Received = 10,000/ 0.665 = 15,037.59 DM

Step 3 :    Invest 15,037.59 DM for 3 months

Amount Receivable = 15,037.59 x 1.0175 = 15,300.7478

Step 4 :    Sell 15,300.7478 DM 3 mf

Amount Receivable = 15,300.7478 x 0.670 = 10,251.50

Profit = 10,251.50 – 10,225 = 26.5 $

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