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:

Minimal Government Interference

Refers to a political and economic principle advocating for reduced government involvement in economic decisions and private enterprises.

Values

The principles or standards of behavior deemed important in life or society.

Biosphere

The global ecological system integrating all living beings and their relationships, including their interaction with elements of the lithosphere, hydrosphere, and atmosphere.

Renewable Energy

Energy sources that are replenished naturally and sustainably, such as solar, wind, hydro, geothermal, and biomass, offering an alternative to fossil fuels.