Finance International Business 4346 Practice Problems (Ch. 6 & 7) 1.

. The dollar spot rate of the Danish kroner is DKr 8.25/$, and the dollar spot exchange rate of the Swiss franc is S r 1.!5/$. a. "hat sho#ld the DKr/S r cross$rate %e so that there are no ar%itrage opport#nities &ignore transaction costs'( %. S#ppose a %ank is offering DKr 5.2)/S r. *t this exchange rate, which c#rrenc+ is o,er,al#ed with respect to the other( Sol#tionThe cross$rate at which triang#lar ar%itrage is not possi%le is- DKr/S r . Direct /#ote S r / Direct /#ote of DKr . $).!)!)!/$).12121 . DKr5.))))8/S r. *t a gi,en cross$rate of DKr 5.2)/S r, the S r wo#ld %e o,er,al#ed since the S r is onl+ worth DKr5.))))8 &%#t is 0#oted at DKr5.2)'. 2. 1arcla+2s %ank is 0#oting a dollar/po#nd exchange rate of $1.354)/po#nd. 5nd#strial %ank is 0#oting a 6apanese +en/dollar exchange rate of 7en128.14/$, and 8idland %ank is 0#oting a 6apanese +en/po#nd cross rate of 7en189/po#nd. 5gnoring %id$ask spreads, is there an ar%itrage opport#nit+ here( 5f there is an ar%itrage opport#nit+, what steps wo#ld +o# take to :ake an ar%itrage profit, and how :#ch wo#ld +o# profit if +o# ha,e $1,))),))) a,aila%le for this p#rpose( Sol#tion;i,en <ross$=xchange >ate . 7en189/? 5:plied <ross$=xchange >ate &7en/?' . Direct /#ote of ?/Direct /#ote of 7en . $1.354)/$).))48 . 7en18!.4@/?. This i:plies that, e,en tho#gh the ? sho#ld %e worth 7en18!.4@, it is 0#oted at onl+ 7en189, i.e., the 7en is o,er,al#ed %+ the existing/gi,en cross$ 0#ote. Therefore, the %ank co#ld engage in triang#lar ar%itrage &%eca#se of the discrepanc+ in 0#oted cross$rates', and the+ wo#ld ha,e to %#+ the o,er,al#ed c#rrenc+, i.e., the 7en. The %ank wo#ld exchange the $1,))),))) to %#+ 7en at the spot, and the+ wo#ld get 7en128,14),))). Then, the %ank wo#ld exchange the 7en for ? at for A at 7en189/po#nd and wo#ld end #p with ?4)),989. The %ank wo#ld next sell ? for BS$ at $1.354)/? and wo#ld get $1,)2),358. The %ank wo#ld th#s generate an ar%itrage profit of $1,)2),358 $ $1,))),))) . $2),358. 9. 6i: "a#gh specialiCes in cross$rate ar%itrage. De notices the following 0#otesSwiss franc/dollar . S r1.5@41/$ *#stralian dollar/BS dollar . *$1.8215/$ *#stralian dollar/Swiss franc . *$1.135)/S r

5gnoring transaction costs, does 6i: "a#gh ha,e an ar%itrage opport#nit+ %ased on these 0#otes( 5f there is an ar%itrage opport#nit+, what steps wo#ld he take to :ake an ar%itrage profit, and how :#ch wo#ld he profit if he has $1,))),))) a,aila%le for this p#rpose(

Sol#tion;i,en <ross$=xchange >ate . *$1.135)/S r 5:plied <ross$=xchange >ate &*$/S r' . Direct /#ote of S r/Direct /#ote of *$ . $).!2!13/$).538@@ . *$1.13)59/S r. This i:plies that, e,en tho#gh the S r sho#ld %e worth onl+ *$1.13)59, it is 0#oted at *$1.135), i.e., the S r is o,er,al#ed %+ the existing/gi,en cross$ 0#ote. Therefore, 6i: Ea#gh co#ld engage in triang#lar ar%itrage &%eca#se of the discrepanc+ in the 0#oted cross$rates', and he wo#ld %#+ the o,er,al#ed c#rrenc+, i.e., the S r. 6i: Ea#gh wo#ld exchange the $1,))),))) to %#+ S r at the spot &a total of $1,))),))) / ).!2!13 . S r1,5@4,)84'. De wo#ld then sell the S r1,5@4,)84 for *$ at the rate of *$1.135)/S r F he wo#ld recei,e a total of *$1,828,!!5. De wo#ld then exchange the *$1,828,!!5 for $ at the rate of $).538@@/*$, and wo#ld end #p with $1,))9,@1@ &this is an ar%itrage profit of $9,@1@ F note the slight ro#nding error fro: the exact answer of $9,@32 that so:e of +o# :a+ get if +o# work with the indirect 0#otes gi,en'. 3. *ss#:e the following infor:ation for a partic#lar %ankEal#e of <anadian dollar in BS dollars $).@) Eal#e of e#ro in BS dollars $).9) Eal#e of <anadian dollar in e#ro e#ro9.)2

;i,en this infor:ation, is triang#lar ar%itrage possi%le( 5f so, explain the steps that wo#ld reflect triang#lar ar%itrage, and co:p#te the profit fro: this strateg+ if +o# had $1,))),))) to #se. Sol#tion;i,en <ross$=xchange >ate . A9.)2/<an$ 5:plied <ross$=xchange >ate &e#ro/<an$' . Direct /#ote of <an$/Direct /#ote of A . $).@)/$).9) . A9.))/<an$. This i:plies that, e,en tho#gh the <an$ sho#ld %e worth onl+ A9.)), it is 0#oted at A9.)2, i.e., the <an$ is o,er,al#ed %+ the existing/gi,en cross$0#ote. Therefore, the %ank co#ld engage in triang#lar ar%itrage &%eca#se of the discrepanc+ in 0#oted cross$rates', and the+ wo#ld ha,e to %#+ the o,er,al#ed c#rrenc+, i.e., the <an$. The %ank wo#ld exchange the $1,))),))) to %#+ <an$ at the spot, and the+ wo#ld get <an$1,111,111, then the+ wo#ld exchange the <an$ for A at A9.)2/<an$ and wo#ld end #p with A9,955,555. The %ank wo#ld next sell A for BS$ at $).9)/A and wo#ld get $1,))!,!!4. The %ank wo#ld th#s generate an ar%itrage profit of $1,))!,!!4 $ $1,))),))) . $!,!!4. 5. 1ased on the infor:ation in the pre,io#s 0#estion, what :arket forces wo#ld occ#r to eli:inate an+ f#rther possi%ilities of triang#lar ar%itrage( Sol#tion- *s a res#lt of selling BS$ for <an$, the ,al#e of the <an$ relati,e to the BS$ wo#ld go #p. 1+ selling <an$ for A, the e#ro wo#ld appreciate against the <an$, and %+ selling A for BS$ the BS$ wo#ld appreciate against the e#ro. *s a res#lt, the possi%ilit+ of triang#lar ar%itrage wo#ld %e eli:inated.

!.

6ason S:ith is a foreign exchange trader with <iti%ank. De notices the following 0#otesSpot exchange rateSix$:onth forward exchange rateSix$:onth $ interest rateSix$:onth S r interest rateS r1.!!24/$ S r1.!558/$ 9.5G per +ear 9.)G per +ear

a. 5gnoring transaction costs, is the interest rate parit+ holding( %. 5s there an ar%itrage possi%ilit+( 5f +es, what steps wo#ld %e needed to :ake an ar%itrage profit( *ss#:ing that 6ason S:ith is a#thoriCed to work with $1,))),))) for this p#rpose, how :#ch wo#ld the ar%itrage profit %e in dollars( Sol#tiona. 5>H holds if pf &or /S F 1' . &1Iih'/&1Iif' F 1 5n this case, pf . /S $1 . &$).!)9@3/Sfr' / &$).!)139/Sfr' F 1 . I).))314 &1Iih'/&1Iif' F 1 . J1 I &).)95/2'K/J1 I &).)9/2'K F 1 . I).))23! Since pf L &1Iih'/&1Iif' F 1, 5>H does not hold. 5n this case, the ar%itrage#r wo#ld prefer to in,est the :one+ in SwitCerland. %. 5f the ar%itrage#r in,ests in the BS, the ar%itrage#r wo#ld ha,e a profit of $1,))),)))M).)95/2 . $14,5)) on the in,est:ent o,er six :onths. 5f the ar%itrage#r in,ests in SwitCerland, the ar%itrage#r wo#ld ha,e to %#+ Sfr at $).!)139/Sfr &Sfr1,!!2,4)3', in,est in SwitCerland at 9.) percent per +ear for six :onths, th#s ha,ing a total of Sfr1,!!2,4)3M&1 I ).)9/2' . Sfr1,!84,!33 after six :onths. The ar%itrage#r wo#ld sell the Sfr proceeds forward at $).!)9@3/Sfr, and wo#ld generate a total $ a:o#nt of Sfr1,!84,!33 M$).!)9@3/Sfr . $1,)1@,295 after six :onths. Th#s, the ar%itrage#r generates an extra profit of $1@,295 $ $14,5)) . $1,495 %+ in,esting in SwitCerland. 4. * foreign exchange ar%itrage#r notices that the 6apanese +en to BS dollar spot exchange rate is 7en1)8/$ and the three$:onth forward exchange rate is 7en1)4.9)/$. The three$:onth $ interest rate is 5.2) percent per ann#: and the three$:onth 7en interest rate is 1.2) percent per ann#:. a. 5s the interest rate parit+ holding( %. 5s there an ar%itrage possi%ilit+( 5f +es, what steps wo#ld %e needed to :ake an ar%itrage profit( *ss#:ing that the ar%itrage#r is a#thoriCed to work with $1,))),))) for this p#rpose, how :#ch wo#ld the ar%itrage profit %e in dollar( Sol#tion5>H holds if pf . &1Iih'/&1Iif' F 1 5n this case, pf . I).))!52 &1Iih'/&1Iif' F 1 . &1 I ).)52/3'/&1 I ).)12/3' F 1 . I).))@@4 Since pf N &1Iih'/&1Iif' F 1, 5>H does not hold. 5n this case, the ar%itrage#r wo#ld prefer to in,est the :one+ in the BS.

5f the ar%itrage#r in,ests in the BS, the ar%itrage#r wo#ld ha,e a profit of $1,))),)))M).)52/3 . $19,))) on the in,est:ent o,er three :onths. *ss#:ing the in,estor went to 6apan, the in,estor wo#ld ha,e p#rchased 7en at 7en1)8/$ &a total of 7en1)8,))),)))', in,est in 6apan at 1.2 percent per +ear for three :onths, th#s ha,ing a total of 7en1)8,))),)))M&1 I ).)12/3' . 7en1)8,923,))) after three :onths. The ar%itrage#r wo#ld sell the 7en proceeds forward at 7en1)4.9)/$, and wo#ld generate a total $ a:o#nt of 7en1)8,923,)))/1)4.9) . $1,))@,539 after three :onths. Th#s, the ar%itrage#r wo#ld generate an extra profit of $19,))) $ $@,539 . $9,354 %+ in,esting in the BS. 8. *ss#:e that the one$+ear interest rate is 12 percent in the Bnited Kingdo:. The expected ann#al rate of inflation for the co:ing +ear is 1) percent for the Bnited Kingdo: and 3 percent for SwitCerland. The c#rrent spot exchange rate is S r9/?. Bsing the precise for: of the international parit+ relations, co:p#te the one$+ear interest rate in SwitCerland, the expected Swiss franc to po#nd exchange rate in one +ear, and the one$+ear forward exchange rate. Sol#tion*ccording to HHH, ef . &1I5h'/&1I5f' F 1 5n this case, &1I5h'/&1I5f' F 1 . &1 I ).)3'/&1 I ).1)' F 1 . $).)5355 ef . =&S'/S F 1 . =&S'/9 F 1 Since ef . &1I5h'/&1I5f' F 1, s#%stit#ting the a%o,e infor:ation res#lts into the HHH relationship i:plies that ef . =&S'/9 F 1 . $).)5355, i.e., =&S'/9 . I).@3535, or =&S' . S r9/?M).@3535 . S r2.89!95/? &i.e., the ? will depreciate'. *ccording to the forward parit+, ef . pf, and so =&S' . , and therefore the one$+ear forward . expected one$+ear spot . S r2.89!95/? *ccording to 5 =, ef . &1Iih'/&1Iif' F 1. Since ef . $).)5355 &see a%o,e', and since the BK interest rate &i.e., if . 12G', s#%stit#tion into the 5 = relationship +ields ef . $).)5355 . &1Iih'/ &1I).12' F 1, i:pl+ing the one$+ear Swiss interest rate sho#ld %e 5.8@ percent. @. The spot $/A is e0#al to 1.14@5. The ann#al one$+ear interest rates on the =#roc#rrenc+ :arket are 3 percent in e#ros and 5 percent in BS dollars. The ann#aliCed one$:onth interest rates are 9 percent in e#ros and 3 percent in BS dollars. a. "hat is the one$+ear forward exchange rate( %. "hat is the one$:onth forward exchange rate( Sol#tion*ccording to 5>H, pf . &1Iih'/&1Iif' F 1 . &1I).)5'/&1I).)3' F 1 . I).))@!2, th#s the one$ +ear forward sho#ld %e $1.1@)85/A &since pf . /S F 1, direct 0#otes'. The one$:onth forward exchange rate wo#ld also %e co:p#ted #sing the 5>H, keeping in :ind howe,er that the one$:onth rates are 9G per +ear for e#ros and 3G per +ear for BS$. Th#s, according to 5>H, the one$:onth pf . &1Iih'/&1Iif' F 1 . &1I).)3/12'/&1I).)9/12' F 1 . I).)))89, and the one$:onth forward sho#ld %e $1.18)38/A.

1). D#stin ;reen likes to in,est in the foreign exchange :arket. *fter an anal+sis of the last 1) +ears of BS dollar to 1ritish po#nd exchange rate data, he has co:e #p with his own :odel to forecast the $/? exchange rate one +ear ahead. 1ased on his :odel, the forecast for the one$+ear ahead exchange rate is $1.5915/?. The spot $/? is e0#al to 1.5!2). The ann#al one$+ear interest rates on the =#roc#rrenc+ :arket are 2 percent in dollars and 3.25 percent in po#nds. a. "hat is the one$+ear forward exchange rate( %. 5f D#stin ;reen in,ests %ased on his :odel, which c#rrenc+ wo#ld he %#+ forward( c. 5f e,er+one were to start #sing D#stin ;reen2s :odel and follow his transaction, what wo#ld happen to the exchange and interest rates( a. *ccording to 5nterest >ate Harit+, /S F 1 . &1Iih'/&1Iif' F 1, or /1.5!2) . &1 I ).)2' / &1 I ).)325' F 1, and so

. $1.5282@/?

%. 1ased on D#stin ;reen2s forecast, =&S' &or expected spot' . $1.5915/?, th#s the ? wo#ld %e worth :ore than s#ggested %+ the forward rate. 1eca#se the po#nd is #nderpriced in the forward :arket &the forward rate is $1.5282@/? and the expected spot is $1.5915/?', D#stin ;reen sho#ld %#+ ? forward at the price of $1.5282@/?. 5f his forecast is acc#rate &i.e., if the po#nd is indeed $1.5915/?', in one +ear, he wo#ld pa+ $1.5282@/?, and then sell the ? for $1.5915/? $ he wo#ld :ake a profit of $1.5915/? $ $1.5282@/? . $).))921/?. c. 5f e,er+one were to start #sing D#stin ;reen2s :odel, e,er+one wo#ld %#+ po#nds forward, and the forward rate of the po#nd wo#ld increase and %eco:e e0#al to $1.5915/?. The spot exchange rate and the dollar and po#nd interest rates wo#ld change so as to %eco:e consistent with this forward rate. * look at interest rate parit+ s#ggests that the spot rate and the interest rate in dollars are likel+ to go #p and the interest rate in po#nds is likel+ to go down, to %e consistent with the increase in the forward rate. 11. S#ppose that the three$:onth forward Swiss franc to dollar rate is S r1.33)/$. The forecast for the three$:onth ahead spot exchange rate %+ *nal+st * is Sfr1.31)/$ and the forecast %+ *nal+st 1 is S r1.58)/$. The act#al spot rate realiCed three :onths later is S r1.9)8/$. a. "hich of the three forecasts, incl#ding the forward rate, is the :ost acc#rate( %. 5f the spot rate at the ti:e of prediction was S r1.32)/$, which anal+st&s' correctl+ predicted the appreciation of the Swiss franc relati,e to the dollar( Sol#tiona. Absolute Value of Deviation from Actual = Absolute Value of (Forecast Actual Spot) *nal+st * *nal+st 1 orward >ate *1S&Sfr1.31)/$$ S r1.9)8/$' . Sfr).1)2/$ *1S&Sfr1.58)/$$ S r1.9)8/$' . Sfr).242/$ *1S&Sfr1.33)/$$ S r1. 9)8/$' . Sfr).).192/$ More Accurate Prediction (based on the lower absolute value of the deviation of forecast from actual) *nal+st *

%. The forward rate and *nal+st 1 erroneo#sl+ predicted that the S r/$ exchange rate wo#ld go #p fro: the then spot rate of S r1.32)/$ &i.e., the S r wo#ld depreciate'. Onl+ *nal+st * correctl+ predicted that the Swiss franc wo#ld appreciate. 12. 1elow are so:e 0#otes of the 6apanese +en/BS dollar spot exchange rate gi,en si:#ltaneo#sl+ on the phone %+ three %anks. *re these 0#otes reasona%le( 5s there an ar%itrage opport#nit+( 1ank * 121.15 F 121.25 1ank 1 121.9) F 121.95 1ank < 121.15 F 121.95 Sol#tionor ar%itrage to %e possi%le in this case, we wo#ld ha,e to find an instance where the 1id at a certain %ank is higher than the *sk at another %ank. *fter co:paring the %ids and asks at all three %anks, note that the 1id at 1ank 1 &7en121.9)' is higher than the *sk at 1ank *. Th#s, an ar%itrage#r co#ld %#+ dollars at 1ank * for 7en121.25, and then sell the dollars to 1ank 1 at 7en121.9). The ar%itrage#r wo#ld generate a profit of 7en121.9) F 7en121.25 . 7en ).)5 per dollar traded. This is a riskless, instantaneo#s profit opport#nit+. 19. 1l#e De:on 1ank expects that the <hinese +#an will depreciate against the dollar fro: its spot rate of $.15 to $.1) in 1) da+s. *ss#:e that 1l#e De:on 1ank has a %orrowing capacit+ of either $1) :illion or 4) :illion +#an in the inter%ank :arket, depending on which c#rrenc+ it wants to %orrow. The following inter%ank lending and %orrowing rates existBS dollar <hinese +#an Pending >ate 8.)G 8.5G 1orrowing >ate 8.9G 8.4G

a. Dow co#ld 1l#e De:on 1ank atte:pt to capitaliCe on its expectations witho#t #sing deposited f#nds( =sti:ate the profits that co#ld %e generated fro: this strateg+. %. *ss#:e all the preceding infor:ation with this exception- 1l#e De:on 1ank expects the +#an to appreciate fro: its present spot rate of $.15 to $.14 in 9) da+s. Dow co#ld it atte:pt to capitaliCe on its expectations witho#t #sing deposited f#nds( =sti:ate the profits that co#ld %e generated fro: this strateg+. Sol#tion- pf . &$.1)$$.15'/$.15 . $).99999 &1Iih'/&1Iif' F 1 . $.))))5 Since pf N &1Iih'/&1Iif' F 1, 1l#e De:on 1ank sho#ld in,est in the BS. The+ wo#ld therefore perfor: the following1. 1orrow 7#an 4):illion fro: <hina at 8.4 percent. 2. <on,ert 7#an 4):illion at $).15/7#an and the+ wo#ld get $1),5)),))) 9. 5n,est $1),5)),))) in the BS at 8.) percent for 1) da+s. 5n 1) da+s, the+ wo#ld collect $1),5)),))) M &1 I ).)8M1)/9!5' . $1),529,)13

3. 5. !.

5f the spot indeed goes to $.1) per 7#an after 1) da+s, the %ank wo#ld sell the $1),529,)13 after 1) da+s and wo#ld get 7#an1)5,29),13). *fter 1) da+s, the %ank wo#ld pa+ off the loan and all interest d#e in <hina, that is 7#an4),))),))) M &1 I ).)85M1)/9!5' . 7#an4),1!!,85) The %ank2s profit wo#ld therefore %e- 7#an1)5,29),13) $ 7#an4),1!!,85) . 7#an9,5)!9,2@) *ss#:e the following infor:ationSpot rate of <anadian dollar @)$da+ forward of <anadian dollar @)$da+ <anadian interest rate @)$da+ BS interest rate /#oted Hrice $.8) $.4@ 3G 2.5G

13.

;i,en this infor:ation, what wo#ld %e the +ield &percentage ret#rn' to a BS in,estor who #sed co,ered interest ar%itrage( &*ss#:e the in,estor in,ests $1,))),))).' Sol#tion5>H holds iforward Hre:i#: or Disco#nt &or pf . /S F 1' . 5nterest >ate Differential &or &1Iih'/&1Iif' F 1' 5n this case, orward Hre:i#: or Disco#nt &or pf ' . /S F 1 . $.4@/$.8) F 1 . $).)125 5nterest >ate Differential . &1Iih'/&1Iif' F 1 . &1 I ).)25'/&1 I ).)3' F 1 . $).)1332 &Qote- in this pro%le:, the interest rates pro,ided are stated Rper periodS F i.e., the in,estor gets 3G per 0#arter &or 1!G per +ear in <anada', and 2.5G per 0#arter &or 1)G per +ear in the BS''. Since pf L &1Iih'/&1Iif' F 1, 5>H does not hold. 5n this case, the ar%itrage#r wo#ld prefer to in,est the :one+ in <anada &see 1lack%oard Qotes F <h. ! for the decision criteria'. At time 0 (current time) To in,est in <anada, the ar%itrage#r will %#+ <anadian dollars at the c#rrent spot of $).8)/<$ &a total of $1,))),)))/).8) . <$1,1,25),)))'. Then, the ar%itrage#r will in,est in <anada <$1,25),))) and earn 3 percent o,er @) da+s, th#s ha,ing a total of <$1,25),))) M &1 I ).)3' . <$1,9)),))) a!ter "0 #a$s. The ar%itrage#r will sell forward the <$1,9)),))) proceeds at $).4@/<$ &the ar%itrage#r will co:plete the transaction in @) da+s'. A!ter "0 #a$s The ar%itrage#r will collect the <$1,9)),))) fro: the <anadian %ank, and f#lfill the forward contract entered into at ti:e Cero. Th#s, the ar%itrage#r will recei,e <$1,9)),))) M).4@ . $1,)24,))) a!ter one $ear &this is a profit of $24,)))'. The ar%itrage#r2s rate of ret#rn is

$24,)))/$1,))),))) . 2.4 percent o,er @) da+s %+ in,esting in <anada &this is ).2 percent higher than the 2.5G the in,estor wo#ld ha,e earned had he sta+ed in the BS'. 15. *ss#:e the following infor:ationSpot rate of 8exican peso 18)$da+ forward of 8exican peso 18)$da+ 8exican interest rate 18)$da+ BS interest rate /#oted Hrice $.1)) $.)@8 !G 5G

;i,en this infor:ation, is co,ered interest ar%itrage worthwhile for 8exican in,estors who ha,e pesos to in,est( =xplain +o#r answer. Sol#tion5>H holds iforward Hre:i#: or Disco#nt &or pf . /S F 1' . 5nterest >ate Differential &or &1Iih'/&1Iif' F 1' 5n this case, orward Hre:i#: or Disco#nt &or pf ' . /S F 1 . $.)@8/$.1) F 1 . $).)2 5nterest >ate Differential . &1Iih'/&1Iif' F 1 . &1 I ).)5'/&1 I ).)!' F 1 . $).))@39 &Qote- in this pro%le:, the interest rates pro,ided are stated Rper periodS F i.e., the in,estor gets !G per 18)$ da+s &or 12G per +ear' in 8exico, and 5G per 18)$da+s &or 1)G per +ear' in the BS'. Since pf N &1Iih'/&1Iif' F 1, 5>H does not hold. 5n this case, the ar%itrage#r wo#ld prefer to in,est the :one+ in the BS &see 1lack%oard Qotes F <h. ! for the decision criteria'. At time 0 (current time) The ar%itrage#r will deposit the $1,))),))) to a BS %ank. A!ter %&0 #a$s The ar%itrage#r will collect $1,))),))) M &1 I ).)5' . $1,)5),))). 'ote 5f the in,estor went to 8exico, the in,estor wo#ld ha,e to %#+ pesos at the c#rrent spot of $).1)/peso &a total of $1,))),)))/).1) . 8TH1),))),)))'. Then, the ar%itrage#r will in,est in 8exico 8TH1,))),))) and earn ! percent o,er 18) da+s, th#s ha,ing 8TH1,))),)))M&1I).)!' . 8TH1),!)),))) a!ter %&0 #a$s. The ar%itrage#r will sell forward the 8TH1),!)),))) proceeds at $).)@8/8TH &the ar%itrage#r will co:plete the transaction in 18) da+s'. *fter 18) da+s, the ar%itrage#r will collect the 8TH1),!)),))) fro: the 8exican %ank, and f#lfill the forward contract entered into at ti:e Cero. Th#s, the ar%itrage#r will recei,e 8TH1),!)),))) M).)@8 . $1,)98,8)) a!ter %&0 #a$s &this is a profit of $98,8))'. The in,estor2s rate of ret#rn wo#ld %e $98,8))/$1,))),))) . 9.88 percent o,er 18) da+s %+ in,esting in 8exico &this is 1.12 percent lower than the 5G the in,estor :akes %+ sta+ing in the BS'.