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Economics homework

04/10/2020 Client: user_3wd25t Deadline: 2 Day

You observe the following quotes: 1 USD = 5.4 BRL (BRL: Brazilian Real) 1 AUD = 0.72 USD (AUD: Australian Dollar) 1 AUD = 4 BRL Is there triangular arbitrage opportunity? How much would the arbitrage profit be if you have $1 million USD to start with? What market forces would occur to eliminate any further possibilities of triangular arbitrage?


 6. (7 pts) You observe the following information: - Spot exchange rate of pound: $1.31/£ - Six-month forward exchange rate: $1.39/£. - Six-month interest rate for the pound: 4.5% per annum - Six-month interest rate for the dollar: 3.5% per annum Assume that you can borrow as much as $1,310,000 or £1,000,000. a. (2pts) Determine whether the interest rate parity (IRP) is currently holding. b. (3 pts) If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit. c. (2 pts) Explain how the IRP will be restored as a result of covered arbitrage activities (i.e. what is the new forward rate to eliminate the covered interest arbitrage)?

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