Will an Arbitrageur Facing the Following Prices Be Able to Make

question 16

Multiple Choice

Will an arbitrageur facing the following prices be able to make money? $\begin{array}{rcccccc}\hline & \text { Bid } & \text { Ask } & & \text { Borrowing } & \text { Lending } \\F_{0}(\$ / €) & \$ 1.40-€ 1.00 & \$ 1.43-€ 1.00 & & i \$ 4.20 \% \mathrm{APR} & 4.10 \% \mathrm{APR} \\F_{36}(\$) & \$ 1.44-€ 1.00 & \$ 1.49-€ 1.00 & & i € 3.65 \% \mathrm{APR} & 3.50 \% \mathrm{APR}\end{array}$

• A)Yes,borrow €1,000,000 at 3.65 percent; trade for $ at the bid spot rate $1.40 = €1.00; invest at 4.1 percent; hedge this with a long position in a forward contract.
• B)Yes,borrow $1,000,000 at 4.2 percent; trade for € at the spot ask exchange rate $1.43 = €1.00; invest €699,300.70 at 3.5 percent; 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 options

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Definitions:

Romantic Love

A deep emotional and passionate affection for another person, often associated with desire and attachment.

Consummate Love

A type of love described by psychologist Robert Sternberg as having three components: intimacy, passion, and commitment.

Commitment

A dedication or obligation that restricts freedom of action.

Lonely People

Individuals who experience a subjective feeling of isolation or lack of companionship.