Will an Arbitrageur Facing the Following Prices Be Able to Make

question 51

Multiple Choice

Will an arbitrageur facing the following prices be able to make money?

• A)Yes, borrow $1,000 at 5%; Trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5%; 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%; Trade for $ at the bid spot rate $1.00 = €1.00; Invest $1,000 at 4.5%; 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 above

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Definitions:

Phi Phenomenon

A visual illusion where separate images shown in rapid succession appear to be a single moving image.

Phi Phenomenon

An optical illusion of perceiving continuous motion between separate objects viewed rapidly in succession.

Preattentive Processing

The subconscious accumulation of information from the environment before it reaches conscious awareness.

Bottom-up Processing

A cognitive process in perception that starts with raw sensory data being received and then integrated to form a perception or understanding, without preconceived context.