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Will an Arbitrageur Facing the Following Prices Be Able to Make

Question 23

Multiple Choice

Will an arbitrageur facing the following prices be able to make money? Will an arbitrageur facing the following prices be able to make money? A) Yes, borrow €1,000,000 at 3.65%; Trade for $ at the bid spot rate $1.40 = €1.00; Invest at 4.1%; Hedge this with a long position in a forward contract. B) Yes, borrow $1,000,000 at 4.2%; Trade for € at the spot ask exchange rate $1.43 = €1.00; Invest €699,300.70 at 3.5%; Hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year) .Cash flow in 1 year $237.76. C) No; the transactions costs are too high. D) None of the above


A) Yes, borrow €1,000,000 at 3.65%; Trade for $ at the bid spot rate $1.40 = €1.00; Invest at 4.1%; Hedge this with a long position in a forward contract.
B) Yes, borrow $1,000,000 at 4.2%; Trade for € at the spot ask exchange rate $1.43 = €1.00; Invest €699,300.70 at 3.5%; Hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year) .Cash flow in 1 year $237.76.
C) No; the transactions costs are too high.
D) None of the above

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