You observe the following one-year interest rates, spot exchange rates and futures prices. Futures contracts are available on €10,000.
| Exchange Rate | Interest Rate | APR | ||||
| S0($/€) | $1.45 = €1.00 | i$ | 4% | |||
| F360($/€) | $1.48 = €1.00 | i€ | 2% | |||
Attempt 1/5 for 10 pts.
Part 1
To make arbitrage profit on one contract, you should
buy one contract on €10,000 now
sell one contract on €10,000 now
sell one contract on €10,000 in one year
buy one contract on €10,000 in one year
Submit
Attempt 1/10 for 10 pts.
Part 2
Detail a strategy to make arbitrage profit. How much profit (you must determine in $ or €) could you make on one contract at maturity?
Submit
Part 3
If future price observed today is not $1.48/€, but $1.46/€, to make arbitrage profit on one contract, you should
sell one contract on €10,000 now
buy one contract on €10,000 in one year
buy one contract on €10,000 now
sell one contract on €10,000 in one year
Submit
.
Part 4
If future price observed today is not $1.48/€, but $1.46/€, is your strategy any different? How much profit (you must determine in $ or €) could you make on one contract at maturity?
