A trader has $1 million available for exploiting an arbitrage opportunity. Given the following information, determine if such an opportunity exists and if so, the maximum amount of profit that can be made by utilizing the $1 million. Ignore all trading costs and taxes.
S₀ = *87
F₁ = *84 (1-year forward)
R_CDN = 5%
R_S = 3%

Question

Quizplus · Accepted Answer

The maximum amount of profit that can be made by utilizing the $1 million is $16,785. This is because the trader can buy the stock in the domestic market for $1 million and sell it in the foreign market for $1,016,785. The trader can then use the proceeds from the sale of the stock to buy back the stock in the domestic market for $1 million, resulting in a profit of $16,785.

A Trader Has $1 Million Available for Exploiting an Arbitrage