Will an Arbitrageur Facing the Following Prices Be Able to Make

question 70

Multiple Choice

Will an arbitrageur facing the following prices be able to make money? $$\begin{array} { c c c c c } & \text { Borrowing } & \text { Lending } & \text { Bid } & \text { Ask } \\€ & 5 \% & 4.5 \% & \text { Spot } \$ 1.00 = € 1.00 & \$ 1.01 = € 1.00 \\€ & 6 \% & 5.5 \% & \text { Forward } \$ 0.99 = € 1.00 & \$ 1.00 = € 1.00\end{array}$$

• A)Yes,borrow $1,000 at 5 percent; trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5 percent; hedge this with a forward contract on €1,044.55 at $0.99 = €1.00; receive $1.034.11.
• B)Yes,borrow €1,000 at 6 percent; trade for $ at the bid spot rate $1.00 = €1.00; invest $1,000 at 4.5 percent; hedge this with a forward contract on €1,045 at $1.00 = €1.00.
• C)No; the transactions costs are too high.
• D)none of the options

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Definitions:

Premarital Cohabitation

The practice of living together and having a sexual relationship without being married.

Substitute Marriage Cohabitation

A living arrangement in which a couple shares a household and life together but is not legally married.

Dating Cohabitation

The state of living together and being involved in an intimate relationship without being married.

Inertia Effect

The tendency of an object or process to continue in its current state, whether at rest or in motion, unless acted upon by an external force.