CURRENCY FORWARD ARBITRAGE QUERY

avinashsharma99
Posts: 3
Joined: Thu Dec 27, 2012 5:10 pm

CURRENCY FORWARD ARBITRAGE QUERY

Postby avinashsharma99 » Tue Jan 29, 2013 2:05 pm

Q. The euro currently trades at $1.0231. The dollar risk-free rate is 4 percent, and the euro risk-free rate is 5 percent. Six-month forward contracts are quoted at a rate of $1.0225. Indicate how you might earn a risk-free profit by engaging in a forward contract. Clearly outline the steps you undertake to earn this risk-free profit. What would be the steps if six month forward contracts are quoted at a rate of $1.0237. Question is to specifically learn the steps, actually.

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shreyas
Finance Junkie
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Joined: Thu Jul 19, 2012 6:49 pm

CURRENCY FORWARD ARBITRAGE QUERY

Postby shreyas » Tue Jan 29, 2013 3:19 pm

Hi Avinash,

Can you be more specific on what exactly is your query

avinashsharma99
Posts: 3
Joined: Thu Dec 27, 2012 5:10 pm

Postby avinashsharma99 » Sat Feb 02, 2013 9:31 pm

There are two queries in this question. First is:
Q. The euro currently trades at $1.0231. The dollar risk-free rate is 4 percent, and the euro risk-free rate is 5 percent. Six-month forward contracts are quoted at a rate of $1.0225. Indicate how you might earn a risk-free profit by engaging in a forward contract. Please advise me the step to take risk-less profit using arbitraging steps.

Q2. What would be the arbitrage steps if six-month forward are quoted at a rate of $1.0237 instead of $1.0225?


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