HW 1 Solutions

HW 1 Solutions - Suggested Solution to HW 1 Easy Example...

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Suggested Solution to HW 1 Easy Example (Slide 37 of Lecture 2): If you are a Japanese trader with ¥ 1million . To take advantage of the opportunity, the trader needs to make the following arrangements: 1). Sell ¥ for $ with Barclays; 2). Sell $ for £ with Credit Lyonnais; 3). Sell £ for ¥ with Credit Agricole. The trader ends up with (1,000,000/120)×1.50×85 = ¥1,062,500. A profit of ¥62,500. Complicated Example (Slide 41 of Lecture 2) : If you start with € 1million . To take advantage of the opportunity, the trader needs to make the following arrangements: 1). Sell € for £ with Credit Agricole (which quotes €/£): 1,000,000/1.3317= £750,919.88 2). Sell £ for $ with Deutsche Bank (which quotes $/£): 750,919.88×1.9712=$1,480,213.26 3). Sell $ for € with Credit Lyonnais (which quotes $/€): 1,480,213.26/1.4742=€1,004,079. The trader ends up with €1,004,079, a profit of €4,079. Problem 5.12
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This note was uploaded on 02/27/2012 for the course FIN 4604 taught by Professor Samiquemarch during the Spring '11 term at FIU.

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