Answers for problem set 2 (updated) - IPC - Problem Set 2(Answers Question 1 i Bank Mon Bid rate is larger than the ask rate of Sun bank so there is

Answers for problem set 2 (updated) - IPC - Problem Set...

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Problem Set 2 (Answers) BAO3402 International Banking and Finance International Parity Condition Question 1 i) Bank Mon Bid rate is larger than the ask rate of Sun bank, so there is possibility to make arbitrage profit ii) . Buy AUD from sun 10.6525 46,937.34 Sell at Mun 10.654 500,070.41 Profit 70.41 iii) Demand and supply (elaborate) Question 2 Explanatory notes: Indirect quotes are given in foreign currencies to the local currency. Indirect ‘bid’ indicates the number of foreign currency units which dealers ready to buy for one local currency unit. Indirect ‘ask’ indicates the number of foreign currency units which dealers ready to sell for one local currency unit. Dealers buy more foreign currency units for one local currency unit and sell lesser number of foreign currency units for one local currency unit. Since the quotes are indirect quotes, locational arbitrage is possible when one location bid rate (indirect) is higher than the other place Ask (indirect) rate. So, one can make arbitrage profit by buying SAR (seeling AUD) at 4.0589SAR/AUD from bank East and selling at 3.8458 to the bank West. Your profit would be 500,000 3.8458 × 4.0589 − 500,000 = 2,029,450 3.8458 − 500,000 = 27,705.55 Question 3 Equilibrium condition 1 ?. ????𝑨𝑼? ?𝑼𝑹 × ??. ????𝑱𝑷𝒀 𝑨𝑼? × ?𝑼𝑹 ???. ???𝑱𝑷𝒀 = ?. ???? ? 𝑵???????? ???????𝒚 ????????? ?????𝒊????? ???????𝒚 ?????????? ?𝒚 ????𝒊?? ?. ???? ??𝒊?? ?? ????????? ???????𝒚 𝒚?? ??? ??𝒚 ?. ??????𝒊? ?? ?????𝒊????? ???????𝒚 Action Steps Buy Euro sell AUD 1 Sell yen and buy AUD 3 Sell Euro and Buy Yen 2 Profit ??𝑦 ???? ≫> 100,000?𝑈? 1.8199?𝑈? ?𝑈? = 54,948.07?𝑈?, ??𝑦 𝐽𝑃? ≫> 54,948?𝑈? ?𝑈? 134.672𝐽𝑃? = 7,399,967.03𝐽𝑃?,
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Problem Set 2 (Answers) BAO3402 International Banking and Finance International Parity Condition ??𝑦 ?𝑈? ≫> 7,399,967.09𝐽𝑃?
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  • Spring '17
  • Exchange Rate, Foreign exchange market, United States dollar, Forward contract

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