Question

Jappa gave the following information in one of his international contracts

-              Spot rate RS 35.0020 = $1

-              6 months forward rate RS 35.9010 = $1

-              Annualized interest rate on 6 months Rupee ( RS) 12%.

-              Annualized rate on 6 months $, 7%

Required

Workout his arbitrage possibilities

Jappa gave the following information in one of his international contracts

-              Spot rate RS 35.0020 = $1

-              6 months forward rate RS 35.9010 = $1

-              Annualized interest rate on 6 months Rupee ( RS) 12%.

-              Annualized rate on 6 months $, 7%

Required

Workout his arbitrage possibilities

Answer 1

Spot Rote: 1$ = Rs 35.0020 6 Month forward Rote = 15 - Rs 35,9010 premium or Rs.is 2. from the above quote, we on observe that the $ is of at discount 1. q Premium 35.9000 - 35.0020 x 100 x sopa 35.0020 5.1368% 12 Det Annualinterest Role in Rs 12. Annual interest Rotein sa F1. Difference between interest Rok - Sy Since, the % premium, is more in s than the difference behoeen interest interata inforword Rete Hence Arbitrage possibility Forist. action plan Invest in & and Borrow from Judia (Rs) Example Sep 1: Bomo Rs1,000 from India S Convest it into & at spot Rote ie. 1000 - $ 28,5697 35.0020 Step 2: Invest the Conerted & ibbo in us @ interent Pol of 7%p.9 Amount in offer 6 Month = 28.5897+28.5697x Zx 6 = 28.5697 + 0.9999 1909 12 $29.5696 Step 3: Convert the Amt Received after 6 Mouth into Rs with forward Rate re. 19 = Rs 35,9010 Amont equivalent in Rs 35.9010 × 29.8896 = Rs 10 61.578 UUUUUUUU

Step 4: Amant to be paid after 6 Month in Rs (India) le. 1000 + 1000 x 12 x 150 6 12 -ROGO. Net Position after 6 months re. Arbitrage Amount Received a 106.578 Amount Poid 1060,000 - Profil Arbitrage Rs 1.578