capital market

1. Triangular arbitrage and cross-rates involve exchange rates between three currencies and the riskless profit-seeking motive that pushes exchange rates into alignment with each other. Use and example to illustrate how and investor could generate a profit using triangular arbitrage strategies.

2. Consider the following quotes involving the dollar, the pound, and the euro.

a) Compute the effective $/£ ask and bid cross-rates.

b) Compute the £/$ ask and bid cross-rates. Assume the euro is the domestic

currency.

c) Can you identify arbitrage opportunities in these markets?

3. Search bid and ask prices for two soft currencies and one hard currency (rates available on the 5th of December 2015) and identify if arbitrages opportunities exist.

4. Discuss the existence of arbitrage opportunities in the FOREX market. Differentiate between hard and soft currencies.

5. Discuss the role of transaction costs for traders looking to benefit from arbitrage opportunities.



$ and € Bid in

Eurozone

Ask in Eurozone

€ and £

Bid in Ask in

London London



Indirect $0.9336 $0.9339 €1.5573 €1.5580 Direct $1.0264 $1.0267 €0.6660 €0.6663

Develop a historical analysis on the US and European term structure of interests. Explain the implications of the current yield curve, and analyse the Federal Reserve and ECB strategies regarding the interest rate policies before, during and after the Global Financial crisis. (Hint: take into consideration expectations regarding inflation rates and economic growth and the current economic climate with regard to predictions. In addition, you should consider the impact of current yield curve with regard to economic recovery and bubble formations).

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