Step 1 : | |||||||||||
Take loan in USD @ 1.50% | |||||||||||
For instance, if you take US$ 1,000,000 loan for two years, the amount to be returned after two years is as follows: | |||||||||||
Amount = Principal X (1 + Interest)^Period | |||||||||||
Amount = 1,000,000 X (1+0.0150)^2 | |||||||||||
=USD 1,030,225 | |||||||||||
Step 2 : | |||||||||||
Convert the US$ 1,000,000 into PLN (at 3 PLN/USD) | |||||||||||
=1,000,000 * 3 | |||||||||||
=3,000,000 | |||||||||||
Invest this amount for 2 years @ 3% | |||||||||||
After 2 years the amount to be received will be = 3,000,000 X (1+0.03)^2 | |||||||||||
=PLN 3,182,700 | |||||||||||
Also, at this point, the speculator will have to enter into a 2 years forward contract to convert USD at 3.05 PLN/USD | |||||||||||
Step 3 : |
|||||||||||
Convert the amount of PLN 3,182,700 into USD at 3.05 PLN/ USD after two years | |||||||||||
= USD 1,043,508 (3,182,700 / 3.05) | |||||||||||
Step 4 : | |||||||||||
Return back the USD loan | |||||||||||
As per step 1, the amount to be returned is = USD 1,030,225 | |||||||||||
However, due to arbitrage, the speculator will have USD 1,043,508 | |||||||||||
Arbitrage gains will be USD 1,043,508 - USD 1,030,225 | |||||||||||
=USD 13283 per USD 1,000,000 | |||||||||||
Hence, to make arbitrage gains USD loan will have to be taken |
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Consider the 2Y zero-rates in Poland and USA are 3% pa. and 1,5% pa, respectively. The...
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Please explain carefully the strategy.
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Please use EXCEL to do it, Thanks!
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