QUESTION 3 Suppose a banker observed the following spot quotations for dollars a

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QUESTION 3 Suppose a banker observed the following spot quotations for dollars and euros. Bank A: $1.0956-62 Bank B:$1.0958-63 Find the abritrage profit available (in terms of dollars) to a banker with 2 million dollars at her disposal. Round intermediate steps to four decimals and your final answer to two decimals. O 730.06 O 1277.84 182.45 365.10 QUESTION 4 Locational arbitrage is possible when: O The bid price for a given ourrency in two locations is different. The ask price for a given currency in two locations is different. OThe bid price for a given location is a given curreny in one location is greater than the ask price in another location. The ask price for a given currency in one location is greater than the bid price in another location. QUESTION 5 Cliok Save and Submit to save and subait. Click Save All Answers to save all answers. Save All Answers FS sk

Explanation / Answer

3.

Spot rates

Bank A $1.0956-62

Bank B $1.0958-63

Arbitraging is possible when a bank's buying price (bid price) is higher than another bank's selling price (ask price).. In the given case , arbitraging is not possible since bid price of Bank A (1.0956) is not more than ask price of Bank B(1.0963). In the same way, bid price of Bank B (1.0958) is not more than ask price of Bank A (1.0962). In other words, if Euro is bought from Bank A at $1.0962 and sold to Bank B at $1.0958, there will be loss. In the same way, if Euro is bought from Bank B at $1.0963 and sold to Bank A at $1.0956, there will be loss. Hence, arbitraging is not possible.

Hence, correct option is (e) i.e 0 arbitrage profit.

4.

Locational arbitrage takes place when the bid price of a bank is more than ask price of another bank. Locational arbitrage is possible only when bid price of a currency in one location is greater than ask price in another location. Hence correct option is (c).

Profit can be obtained only when we buy currency at a lower rate in one location and sell it in another location at a higher price. Thus buying currency at lower rate in one location and selling it in another location at a higher price is termed as locational arbitrage

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