Suppose you obtain the following quotes:
Foreign exchange market: Spot rate:
EUS$G
day Forward rate:
Money market day:
pa
pa
a Based on the above information, is there any arbitrage opportunity? If yes, what should the
commercial bank do to capture this arbitrage opportunity? If not, why? Explain.
b Suppose your firm can move the markets ie change the spot exchange rate, the forward exchange
rate, and the corporate bond rates in both countries what happens to these four terms after the
transactions you perform in part a Explain in words.
c Instead of affecting the interest rates and the day forward rate, suppose the spot exchange rate
bears all the burden of adjustments, find the US spot rate that would eliminate interest arbitrage.
