There are three currencies: alpha (a), beta (b) and gamma (c). The three exchange rates are as follows: 1 alpha buys you 5 betas; 1 beta buys you one half of one gamma; 1 gamma buys you one third of one alpha. That is, Xb/a = 5, Xc/b =1/2 , Xa/c =1/3 . There is no bid-ask spread, so that Xa/b = 1/Xb/a etc. There are six specialist traders, AB, BA, BC. CB, CA and AC who trade the six possible pairs of currencies: trader AB lives in Alpha-land and wants to sell alphas for betas; trader BA lives in Beta-land and wants to sell betas for alphas; and so on. All of these traders are willing to trade at the current market exchange rates, as quoted above. In the absence of arbitrage opportunities, what will be the relationship between the three exchange rates Xb/a, Xc/b and Xa/c. Compare the relative importance of least cost dealing and arbitrage in determining the relative equilibrium exchange rates.

There are three currencies: alpha (a), beta (b) and gamma (c). The three exchange rates are as follows: 1 alpha buys you 5 betas; 1 beta buys you one half of one gamma; 1 gamma buys you one third of one alpha. That is, Xb/a = 5, Xc/b =1/2 , Xa/c =1/3 . There is no bid-ask spread, so that Xa/b = 1/Xb/a etc. There are six specialist traders, AB, BA, BC. CB, CA and AC who trade the six possible pairs of currencies: trader AB lives in Alpha-land and wants to sell alphas for betas; trader BA lives in Beta-land and wants to sell betas for alphas; and so on. All of these traders are willing to trade at the current market exchange rates, as quoted above. In the absence of arbitrage opportunities, what will be the relationship between the three exchange rates Xb/a, Xc/b and Xa/c. Compare the relative importance of least cost dealing and arbitrage in determining the relative equilibrium exchange rates.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 32QA

See similar textbooks

Similar questions

There are three currencies: alpha (a), beta (b) and gamma (c). The three exchangerates are as follows: 1 alpha buys you 5 betas; 1 beta buys you one half of onegamma; 1 gamma buys you one third of one alpha. That is,Xb/a = 5, Xc/b = 1/2 , Xa/c = 1/3.There is no bid-ask spread, so that Xa/b = 1/Xb/a etc. There are six specialisttraders, AB, BA, BC. CB, CA and AC who trade the six possible pairs of currencies:trader AB lives in Alpha-land and wants to sell alphas for betas; trader BA livesin Beta-land and wants to sell betas for alphas; and so on. All of these traders arewilling to trade at the current market exchange rates, as quoted above. What is the cost of one beta in terms of alpha when trading indirectly usingthe currency gamma? When buying betas with alphas, is the direct route orthe indirect route the method of least cost dealing?
There are three currencies: alpha (a), beta (b) and gamma (c). The three exchangerates are as follows: 1 alpha buys you 5 betas; 1 beta buys you one half of onegamma; 1 gamma buys you one third of one alpha. That is,Xb/a = 5, Xc/b = 1/2 , Xa/c = 1/3.There is no bid-ask spread, so that Xa/b = 1/Xb/a etc. There are six specialisttraders, AB, BA, BC. CB, CA and AC who trade the six possible pairs of currencies:trader AB lives in Alpha-land and wants to sell alphas for betas; trader BA livesin Beta-land and wants to sell betas for alphas; and so on. All of these traders arewilling to trade at the current market exchange rates, as quoted above. Suppose you are an arbitrage trader located in Alpha-land. Is there an arbitrageopportunity? What strategy would you adopt to exploit it and with whom doyou trade?
H5. In two different markets, you see the following prices. Market #1: 20 Call = 5.50, 20 Put = 3.50, Underlying = 22 Market #2: 110 Put = 9.50, 115 Put = 2.50, Underlying = 110 You can trade in either market, but not both. Please describe: What trades will you do to lock in the highest amount of profit? How much profit (to one decimal place)?
We will derive a two-state put option value in this problem. Data: S0 = $180; X = $190; 1 + r = 1.10. The two possibilities for ST are $210 and $110.a. The range of S is $100 while that of P is $80 across the two states. What is the hedge ratio of the put? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) (The answer for this one is -.80) :)b. Form a portfolio of four shares of stock and five puts. What is the (nonrandom) payoff to this portfolio? (Round your answer to 2 decimal places.) c. What is the present value of the portfolio? (Round your answer to 2 decimal places.) d. Given that the stock currently is selling at $180, calculate the put value. (Do not round intermediate calculations and round your answer to 2 decimal places.)
There are two consumers and two goods (A and B) in a competitive economy. At the competitive equilibrium, each consumer’s MRSAB of good A for good B is 3, which means each would be willing to trade 3 units of good B for one unit of good A. The price of good A is $15. What is the price of good B? Please round your answer to two decimal places, if necessary.
We will derive a two-state put option value in this problem. Data: S = $130; X = $140; 1+r=1.10. The two possibilities for ST are $170 and $95. Required: a. The range of S is $75 while that of P is $45 across the two states. What is the hedge ratio of the put? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Hedge ratio es b. Form a portfolio of three shares of stock and five puts. What is the (nonrandom) payoff to this portfolio? (Round your answer to 2 decimal places.) Nonrandom payoff c. What is the present value of the portfolio? (Round your answer to 2 decimal places.) Present value
Consider a two-factor Arbitrage Pricing Theory (APT) model, T; = a; + b1,ifı + b2.i f2 + €i, with the following information Asset i Asset 1 0.07 0.50 0.25 Asset 2 0.15 1.10 0.75 Asset 3 0.20 b1,3 Hi b1i b2i 1.0 and the risk-free rate rp is 0.025. (a) Find the value of b13 to preclude arbitrage opportunity. (b) is an Asset 4 with 4 = 0.13, b14 = 0.8, and b2.4 = 0.4. Explain how you would exploit an arbitrage opportunity if there
You purchase a call with a strike of K-22 at a premium of 1.73 and you purchase a put with a strike of K-22 at a premium of 2.13. At maturity, the underlying is worth 15.31. What is your profit (or loss)? {Enter your answer in dollars with 2 decimals, but do not use the "$". Enter a loss with a negative sign. For example, if the profit/loss is -123.45, enter-123.45 with the negative sign for your answer. }
a. A butterfly spread is the purchase of one call at exercise price X1, the sale of two calls at exercise price X2, and the purchase of one call at exercise price X3. X1 is less than X2, and X2 is less than X3 by equal amounts, and all calls have the same expiration date. Graph the payoff diagram to this strategy.b. A vertical combination is the purchase of a call with exercise price X2 and a put with exercise price X1, with X2 greater than X1. Graph the payoff to this strategy.
Assume the bid rate of an Yen dollar is $ 1.8 while the ask rate is $ 3.5 at Arab Bank.Assume the bid rate of an Yen dollar is $3.4 while the ask rate is $5.7 at Palestine Bank. Given this information, what would be your gain if you use $8876.7 and execute locational arbitrage? =8876.713.5^ * 3.4b =8876.7/5.7^ * 3.5c =8876.7/3.4^ * 1.8d = 8876.7 /3.5^ * 5.7
Assume the money demand function in the picture, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: * (M/P)d = 2,200 - 200r drop by 1 percentage point. remain unchanged. Odrop by 2 percentage points. Odrop by 4 percentage points.
Suppose that in a two-period Arrow-Debreu economy with three states, the state probabilities are T₁ = 0.1, 7₂ = 0.55, 73=0.35 and the state prices are 9₁ = 0.2, 9₂=0.5, 93 = 0.8 for states 1, 2, and 3 respectively. Assume that an asset has the state-contingent dividend given in the following table, and the observed price of the asset is 4.1. State-contingent dividend State 1 State 2 State 3 Asset's dividend 5 3 2 According to information above, which one of the following statements regarding arbitrage opportunities is correct? O A. In this case, arbitrage opportunities do not exist. O B. In this case, arbitrage opportunities exist because the asset is over-priced. O c. In this case, arbitrage opportunities exist because the asset is under-priced. O D. Due to insufficient information, it is inconclusive whether arbitrage opportunities exist or not.