NMIMS Sep 2022 MBA assignments - Is triangular (three-point) arbitrage possible

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International Finance

1. The largest trading partner of India is the USA. If the inflation in India is higher than that of the – explain how it will impact the value of Indian rupee against USD under free floating exchange system. Will the US consumers continue to buy Indian products under such situation? (10 Marks)

2. Assume the following information:

Particulars Quoted Price
Value of Canadian Dollars (C$) in terms of
US dollars ($) $0.90
Value of New Zealand (NZ$) in US
Dollars($) $ 0.30
Value of Canadian dollar (C$) in New
Zealand dollar (NZ$) NZ$3.02.

Based on the above information please answer the following question –
a) Is triangular (three-point) arbitrage possible?
b) If the answer to question (a) is affirmative, please explain the steps that would result in arbitrage profit if you have $1 million. Quantify the arbitrage profit.
c) How the market forces will act to eliminate triangular arbitrage. (10 Marks)

3. G Co Ltd- a famous US based firm requires 10 million pound (GBP) by way of loan to finance a new venture in UK. But the firm being unknown to British investors is unable to get financing from UK debt market nor any UK bank. Hence, the firm decides to raise fund from US debt market through dollar-denominated 3 years’ bond at annual coupon of 10% PA. It will then convert the dollar ($) into GBP at prevailing spot rate of GBP/ $ = $1.70.

Over the each of next 3 years it plans to use the revenue earned in GBP from UK market out of new business to make its annual debt payment. G Co engages in currency swap agreement with a counter-party in which it will convert GBP to USD at an exchange rate of $1.70 per GBP at the end of each of next 3 years.

Answer the following questions –

a. How many dollars should G Co Ltd borrow initially to support new UK venture? (5 Marks)

b. How many pound should G specify in the swap agreement that will swap over each of the next 3 years in exchange of USD so that it can make its annual coupon payment to the US creditors? (5 Marks)

For Nmims answersheets contact
[email protected]
+91 95030-94040

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