第四次作业答案 a) Buy IBX stock in Tokyo and simultaneously sell them in NY, and your arbitrage profit is $2 per share b) The prices will convers them, roughly $0.35 m this ng exactly equal, there can remain a 1% discrepancy between c)Instead of the prices becom 2 a)Money market hedge: borrow the dollar now, convert the dollar into the sterling and deposit the sterling. The future dollar cost is fixed Forward market hedge: buy(long)f forward contract b) The one-year f forward rate is 1+0.08 S 1+s=1.50× =14464$/￡ 1+0.12 c)If the market f forward rate is $1.55/f, there is an arbitrage opportunity. Assuming the contract size is fl million then the arbitrageur should borrow the dollars convert into the pounds and invest in pounds, and sell them at the market forward rate. The details and cash flows(in millions) of the transactions are as follows Cash Flows at t=0 Cash Flows at t=1 Sell￡ forward short 0 +$155and-￡1 Borrow dollar s1.50/(1+0.12) $150×108/1.12 Convert dollar into pound[-1.50/(1+0.12)and f1/(1+0. 12) Deposit pound ￡11(+0.12) +￡1 155-14464=5010361 See lecture notes and Textbook C Gary Xu AcF2 14 Princip les of finance© Gary Xu AcF214 Principles of Finance 1 第四次作业答案 1. a) Buy IBX stock in Tokyo and simultaneously sell them in NY, and your arbitrage profit is $2 per share. b) The prices will converge. c) Instead of the prices becoming exactly equal, there can remain a 1% discrepancy between them, roughly $0.35 in this case. 2. a) Money market hedge: borrow the dollar now, convert the dollar into the sterling and deposit the sterling. The future dollar cost is fixed. Forward market hedge: buy (long) £ forward contract b) The one-year £ forward rate is: 1.4464$ / £ 1 0.12 1 0.08 1.50 1 1 £ $ 0,1 0 = + + =  + + = r r F S c) If the market £ forward rate is $1.55/£, there is an arbitrage opportunity. Assuming the contract size is £1 million, then the arbitrageur should borrow the dollars, convert into the pounds and invest in pounds, and sell them at the market forward rate. The details and cash flows (in millions) of the transactions are as follows: Arbitrage Transactions Cash Flows at t = 0 Cash Flows at t = 1 Sell £ forward short 0 +$1.55 and −£1 Borrow dollar Convert dollar into pound Deposit pound $1.50 /(1+ 0.12) −$1.50/(1+ 0.12)and £1/(1+ 0.12) − £1/(1+ 0.12) −$1.501.08/1.12 +£1 0 1.55−1.4464 = $0.1036 3 . See Lecture Notes and Textbook