Will an Arbitrageur Facing the Following Prices Be Able to Make

question 91

Multiple Choice

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

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