Question

(b) Montreux asset management has $10,000. The dollar rate on the Euro is 1.380 Euro US Dollar Equivalent Currency per US$ Country Contract 1.3733 1.3716 1.3677 Spot 30-day future 90-day future 0.7282 0.7290 0.7311 Paris uro Based on the information in the table above, carefully exp lain whether arb itrage is possible? What is the gain or loss in dollars? [5 marks]

Answer 1

Since there is difference in spot rate here ($1.380) and in paris ($1.3733),there is arbitrage oppurtunity.

We will buy euro from paris (it is cheaper there) and sell here.

Steps

1)Buy 10000/1.3733 =euro7282 from paris

2)Sell euro 7282 @1.380 here getting $10049.16

Profit (in $)= $100049.16-$10000=$49.16

We will not consider future contracts because no interest rates are given and also we have a spot arbitrage.

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