Hedging/Arbitrage the 3-Month Forward Rate Research Proposal

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1555209 / .1545953

R/2 =.0059872 c) the ask price for dollars in three months is 1 / 6.435 =.1554001; therefore for FFR 1,000,000 you will receive $155,400.10 d) the bid price for francs in six months is 1 / 6.430 =.1555209; therefore it will cost $77, 760.45 for the FFR 500,000.

3. The bid from the Paris dealer would be.03/.2 =.15.

The ask from the Paris dealer would be.0335 / .202 =.1658415

4. The DEM is undervalued as of December 31, 1999. The PPP calculations for the DEM as follows:

5225 (1.05/1.

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025) =.5352438;.5252438 (1.045 / 1.02) =.5483624;.5483624 (1.055 / 1.035) =.5589587 should have been the value of the DEM on December 31, 1999.

5. Given the 1% mandatory profit, arbitrage opportunities exist with DEM/FFR exchanges in Frankfurt and Paris. Three point arbitrage opportunities are also possible with transactions beginning with the purchase of FFR in New York; the purchase of FFR in Frankfurt; the sale of FF in Frankfurt; the purchase of dollars in Paris.....

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